<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
-------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
SOFTWARE AG SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
DELAWARE 5734 54-1167173
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
11190 SUNRISE VALLEY DRIVE
RESTON, VA 20191
(703) 860-5050
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
-------------------
DANIEL F. GILLIS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
11190 SUNRISE VALLEY DRIVE
RESTON, VA 20191
(703) 860-5050
(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------------
COPIES TO:
ROBERT B. OTT, ESQ. PETER B. TARR, ESQ.
RICHARD E. BALTZ, ESQ. BRENT B. SILER, ESQ.
ARNOLD & PORTER HALE AND DORR LLP
555 TWELFTH STREET, N.W. 1455 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004 WASHINGTON, D.C.
(202) 942-5000 (202) 942-8400
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock $.01 par
value per share....... 6,279,243 $27.44 $172,302,428 $50,830
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 819,031 shares of Common Stock issuable upon exercise of an over-
allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 21, 1998
[LOGO OF SOFTWARE AG SYSTEMS, INC. APPEARS HERE]
5,460,212 SHARES
COMMON STOCK
--------------
All of the 5,460,212 shares of Common Stock of Software AG Systems, Inc. (the
"Company") offered hereby are being sold by certain stockholders of the Company
(the "Selling Stockholders"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares being sold
by the Selling Stockholders.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under the
symbol "AGS." On April 20, 1998, the last reported sales price for a share of
Common Stock was $26.88.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS (1) STOCKHOLDERS (2)
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<S> <C> <C> <C>
Per Share............................ $ $ $
- --------------------------------------------------------------------------------
Total (2)............................ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters as stated herein (the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) The Selling Stockholders have granted to the Underwriters a 30-day option
to purchase an aggregate of up to an additional 819,031 shares of Common
Stock on the same terms as set forth above, solely to cover over-
allotments, if any. See "Underwriting." If this option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Selling Stockholders will be $ , $ and $ , respectively.
--------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON SMITH BARNEY
EVEREN SECURITIES, INC.
The date of this Prospectus is , 1998.
<PAGE>
[COMPANY LOGO AND GRAPHICAL SCHEMATIC, UNDER THE CAPTION "SAGA'S ENTERPRISE
SOLUTION," DEPICTING THAT THE COMPANY'S ENTERPRISE APPLICATION INTEGRATION
PRODUCT AND SERVICE OFFERINGS ENABLE THE INTEGRATION OF MAINFRAME CLASS LEGACY
APPLICATIONS WITH DIFFERENT SOURCES OF INFORMATION. SUB-CAPTIONS INCLUDE
"MAINFRAME APPLICATIONS," "CLIENT/SERVER," "INTERNET/INTRANET," "DATA
WAREHOUSE" AND "PACKAGED APPLICATIONS."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
PLEASE SEE "UNDERWRITING."
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 7
Company Background....................................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Price Range of Common Stock.............................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 34
Management............................................................... 45
Certain Relationships and Transactions................................... 52
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 63
Available Information.................................................... 63
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------------
The Company's principal executive offices are located at 11190 Sunrise
Valley Drive, Reston, Virginia 20191, and its telephone number is (703) 860-
5050.
ENTIRE(R), PREDICT(R), ADAPLEX+(R), ENTIRE NET-WORK(R) and ENTIRE ACCESS(R)
are registered trademarks of the Company, and iXpress(TM), EntireX DCOM(TM),
ENTIRE BROKER(TM), ENTIRE BROKER SDK(TM), ENTIRE BROKER APPC(TM), ENTIRE SAF
Gateway(TM), INSIGHT 2000SM, INSIGHT 2000 Tool Kit(TM), CONSTRUCT(TM), NATURAL
Lightstorm(TM), CONSTRUCT Spectrum(TM), CONSTRUCT Spectrum SDK(TM), ADABAS
Delta Save Facility(TM), ADABAS FASTPATH(TM), ADABAS SQL Server(TM) and ADABAS
Vista(TM) are trademarks or service marks of the Company. Trade names and
trademarks of other companies appearing in this Prospectus are the property of
their respective owners.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information set forth in "Risk Factors" and the
Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
materially from those results discussed in these forward-looking statements and
from the results historically experienced. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
THE COMPANY
Software AG Systems, Inc. and its subsidiaries (the "Company") is an
enterprise solutions company that provides robust software products and related
professional services to large organizations with complex computing
requirements. The Company's products are used to build, enhance and integrate
mission-critical applications that require reliability, scalability and
security, such as customer billing systems, financial accounting systems and
inventory management systems. To complement its products, the Company has a
comprehensive professional services offering, including consulting, software
integration, systems implementation and large project management services. The
Company has over 24 years of experience in addressing the needs of
organizations with complex enterprise level computing environments.
The Company provides enterprise development software products and related
professional services used by organizations to develop new mission-critical
applications and enterprise enablement software products and related
professional services used to extend and integrate business applications. The
Company's enterprise development products include ADABAS, a high-performance
database management system designed to operate with a variety of data types and
computer platforms, and NATURAL, a 4GL programming language that enables the
development of applications that are portable, scaleable and interoperable
across multiple computing platforms. The Company also provides enterprise
enablement software products and professional services that allow organizations
to integrate their mission-critical applications with other applications and
extend them to the Internet and intranets. Products in this area include
ENTIRE, a family of enterprise application integration products that
facilitates the communication between application components across
heterogeneous computing environments; iXpress, a web application assembly and
deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX
technology to integrate applications written in a variety of programming
languages. The Company also has a year 2000 program which offers an internally
developed software product, INSIGHT 2000 Tool Kit, as well as project
management and consulting services to assist customers in the resolution of
their year 2000 problem. The Company's professional services that complement
its products include application development and enhancement, application
reengineering, application porting, rightsizing and application integration.
The Company's strategy is to further leverage its current leadership position
in software solutions for the development and integration of enterprise
applications by extending its product and professional services offerings with
a particular focus on the application integration market. Key elements of the
Company's strategy include enhancing and extending product offerings with added
features and functionality, broadening its product offerings for the enterprise
application integration market, leveraging its customer base, expanding
professional service offerings and leveraging distribution channels.
On March 31, 1997, the senior management of the Company and Thayer Equity
Investors III, L.P. ("Thayer") acquired approximately 89% of the then
outstanding Common Stock of the Company (the "Recapitalization"). Prior to the
Recapitalization, the Company was a wholly owned subsidiary of Software AG, a
large German software company ("SAG"). Immediately prior to the
Recapitalization, the Company renegotiated its licensing agreement with SAG (as
renegotiated, the "Cooperation Agreement") to provide the Company the exclusive
and perpetual right to license and service in North America, South America,
Japan and
4
<PAGE>
Israel (collectively, the "Territory") both existing and future products
developed or acquired by SAG. The Company is required to pay SAG 24% of the net
revenues derived from such license, which royalty rate is fixed for 20 years.
See "Company Background."
The Company sells and markets its software products and professional services
through direct and indirect channels. In North America, the Company sells and
markets its products through a direct channel that includes over 120 people in
19 offices. The Company sells its products in over 20 additional countries
through six exclusive distributorships in South America, Japan and Israel. In
addition, the Company has access to the distribution channels of SAG in over 50
countries outside the Territory for the Company's products (other than those
licensed from SAG). The Company focuses on selling Enterprise License
Agreements ("ELAs"), which are typically long-term contracts of three to five
years and include the provision of software products, professional services and
maintenance support.
The Company has over 1,500 customers, consisting primarily of major
corporations, government agencies and educational institutions. The Company's
customers include Morgan Stanley, Dean Witter, Discover & Co., Delta Air Lines,
Inc., Sprint Corporation, Federal Express Corp., Nissan Motor Co., LTD., Cable
and Wireless, PLC, Banorte Bank (Mexico), State of California, State of New
Jersey, Federal Bureau of Investigation, Brown University and the University of
Texas. Most of the Company's customers have been long term users of its
products and services. For the year ended December 31, 1997, approximately 95%
of the Company's customers who were eligible renewed at least one of their
maintenance agreements.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Selling Stockholders....... 5,460,212 shares
Common Stock to be Outstanding after the Offering (1).. 29,917,453 shares
Use of Proceeds........................................ The Company will not
receive any proceeds
from the Offering
NYSE Symbol............................................ AGS
</TABLE>
- --------
(1) Includes 386,062 shares of Common Stock that are being offered for sale by
certain Selling Stockholders pursuant to the exercise by such Selling
Stockholders of outstanding stock options granted under the Software AG
Systems, Inc. 1997 Stock Option Plan (the "Option Plan"), but excludes (i)
the remaining 4,679,585 shares of Common Stock issuable upon the exercise
of stock options outstanding under the Option Plan as of April 17, 1998 and
(ii) 1,791,107 additional shares of Common Stock reserved for future
issuance under the Option Plan. As of April 17, 1998, there were (i)
5,065,647 shares of Common Stock issuable upon the exercise of outstanding
stock options granted under the Option Plan at a weighted average exercise
price of $5.46 per share and (ii) 1,791,107 additional shares of Common
Stock reserved for future issuance under the Option Plan.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1) PREDECESSOR
------------------------------------ ------------ -----------
THREE
MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------------------------- MAR. 31,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Software license fees..................... $ 51,672 $ 51,832 $ 52,061 $ 52,163 $ 64,137 $ 7,341
Maintenance fees.......................... 57,264 65,871 65,307 69,702 72,689 17,352
Professional service fees................. 31,175 29,552 35,194 34,975 44,398 9,948
-------- -------- -------- -------- -------- -------
Total revenues........................... 140,111 147,255 152,562 156,840 181,224 34,641
Gross profit.............................. 70,149 77,429 81,239 83,869 94,984 17,127
Operating expenses before write-off....... 75,120 76,534 78,051 78,588 75,171 15,817
Write-off of acquired in-process research
and development costs (2)................ -- -- -- -- 6,051 --
Income (loss) from operations............. (4,971) 895 3,188 5,281 13,762 1,310
Net income................................ $ 6,380 $ 1,382 $ 3,326 $ 6,209 $ 6,711 $ 1,373
======== ======== ======== ======== ======== =======
Net income per common share (3)........... $ 0.23 $ 0.05 $ 0.12 $ 0.23 $ 0.27 $ 0.06
======== ======== ======== ======== ======== =======
Net income per common share--assuming
dilution (3)............................. $ 0.22 $ 0.05 $ 0.11 $ 0.21 $ 0.25 $ 0.05
======== ======== ======== ======== ======== =======
Dividends................................. $ -- $ 600 $ 1,700 $ 9,000 $ -- $ --
======== ======== ======== ======== ======== =======
<CAPTION>
SUCCESSOR
-----------------
NINE THREE
MONTHS MONTHS
ENDED ENDED
DEC. 31, MAR. 31,
1997 1998
-------- --------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Software license fees..................... $ 56,796 $21,649
Maintenance fees.......................... 55,337 19,800
Professional service fees................. 34,450 14,414
-------- --------
Total revenues........................... 146,583 55,863
Gross profit.............................. 77,857 31,635
Operating expenses before write-off....... 59,354 23,433
Write-off of acquired in-process research
and development costs (2)................ 6,051 --
Income (loss) from operations............. 12,452 8,202
Net income................................ $ 5,338 $ 5,390
======== ========
Net income per common share (3)........... $ 0.21 $ 0.18
======== ========
Net income per common share--assuming
dilution (3)............................. $ 0.20 $ 0.17
======== ========
Dividends................................. $ -- $ --
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 50,276
Working capital....................................................... 65,429
Total assets.......................................................... 199,600
Total stockholders' equity............................................ 95,243
</TABLE>
- --------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
the Recapitalization) and for the nine months ended December 31, 1997
(subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for the
year ended December 31, 1997 relates to the Company's acquisition of R.D.
Nickel and Associates, Inc. Before deducting the nonrecurring write-off for
this combined period, income from operations was $19.8 million, net income
was $12.8 million and basic and diluted net income per common share were
$0.51 and $0.48, respectively.
(3) In accordance with Statement of Financial Accounting Standard No. 128
"Earnings Per Share" ("SFAS No. 128") issued by the Financial Accounting
Standards Board, the Company calculated and presented basic and diluted
earnings per share for the current period. The Company also retroactively
adopted SFAS No. 128 for all prior periods presented in calculating and
presenting the earnings per share. Basic earnings per share is based on
income available to common stockholders divided by the weighted average
number of common shares outstanding. Diluted earnings per share is also
based on income available to common stockholders divided by the sum of the
weighted average number of common shares outstanding and all potential
common shares which are dilutive. See Note 1 of Notes to Consolidated
Financial Statements.
Unless the context otherwise requires, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option, and
all references in this Prospectus to the "Company" or "Software AG Systems,
Inc." refer to Software AG Systems, Inc., a Delaware corporation, and its
consolidated subsidiaries.
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements and from the results
historically experienced as a result of certain factors, including those in
the following risk factors and elsewhere in this Prospectus. In addition to
the other information contained in this Prospectus, the following risk factors
should be considered carefully in evaluating the Company and its business
before purchasing shares of the Common Stock offered hereby.
POTENTIAL FLUCTUATIONS IN QUARTERLY PERFORMANCE; SEASONALITY OF THE BUSINESS
The Company has experienced significant quarterly and other fluctuations in
revenues and results of operations, and the Company expects these fluctuations
to continue in the future. The Company believes that these fluctuations have
been primarily attributable to the budgeting and purchasing practices of its
customers, and, to a lesser extent, the Company's sales commission practices,
which are based partly on annual quotas, and other factors. The Company's
revenues and results of operations may also be affected by seasonal trends
which have resulted in higher revenues in the Company's third and fourth
quarters and lower revenues in its first and second quarters. The Company's
professional services fees tend to fluctuate due to the completion or
commencement of significant projects, the number of working days in a quarter
and the Company's ability to attract, retain and efficiently utilize
professional services personnel. The Company's future revenues and operating
results may fluctuate as a result of these and other factors, including the
demand for the Company's products and services, the timing and cost of new
product and service introductions and product enhancements by the Company or
its competitors, changes in the mix of products and services sold by the
Company and in the mix of sales by distribution channels, commencement or
conclusion of significant service contracts, timing of any acquisitions and
associated costs, the size, timing and terms of customer orders, including
delays in significant orders, changes in pricing policies by the Company or
its competitors, the timing of collection of accounts receivable, changes in
foreign currency exchange rates, competitive conditions in the industry and
general economic conditions.
The Company's expense levels are based, in part, on its expectation of
future revenues, and expense levels are, to a large extent, fixed in the short
term. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, the Company's results of operations are likely to
be materially and adversely affected. The Company's net income may be
disproportionately affected by a reduction in revenue because a large portion
of the Company's expenses cannot be easily reduced. In addition, the Company
intends to increase its operating expenses by expanding its software product
development staff, increasing its professional services and sales and
marketing operations, expanding its distribution channels and hiring personnel
in other operating areas. The Company expects to experience a significant time
lag between the date professional services, sales and technical personnel are
hired and the date such personnel become fully productive. The timing of such
expansion and the rate at which new technical, professional services and sales
personnel become productive as well as the timing of the introduction and the
productivity of new distribution channels could cause material fluctuations in
quarterly results of operations. Furthermore, to the extent such increased
operating expenses precede or are not subsequently followed by increased
revenues, the Company's business, financial condition and results of
operations could be materially and adversely affected.
Due to all of the foregoing factors, it is likely that in some future
periods the Company's revenues or results of operations will be below the
expectations of securities analysts or investors, in which case the market
price of the Common Stock would likely be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Quarterly Results of Operations."
RELATIONSHIP WITH AND ROYALTY PAYMENTS TO SAG
The Company has the exclusive and perpetual right to license and service in
North America, South America, Japan and Israel both existing and future
products developed or acquired by SAG and, historically, substantially
7
<PAGE>
all of the Company's revenues have been generated from the licensing and
servicing of products developed or acquired by SAG. As a result, a materially
adverse change in the financial condition or a change in control of SAG could
have a material adverse effect on the business, financial condition and
results of operations of the Company. In the past, SAG has reported operating
losses. In addition, the failure of SAG to develop new products or
enhancements to existing products in a timely manner, to provide ongoing
technical support for its products or to adequately protect its proprietary
rights could have a material adverse effect on the business, financial
condition and results of operations of the Company. In the past, the Company
has experienced delays in receiving products from SAG in a timely manner. The
Cooperation Agreement also requires the Company to pay SAG 24% of the net
revenues derived during the next 20 years from the Company's licensing of
products developed or acquired by SAG. In addition, to the extent that the
Company's aggregate royalty payments to SAG fall below $21.0 million in any
calendar year through the year 2000, the Company generally is required to pay
the differential to SAG, and any such payment could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Because SAG has the exclusive and perpetual right to license and service in
all territories other than North America, South America, Japan and Israel both
existing and future products developed or acquired by the Company, the Company
is dependent on SAG for the distribution of these products outside of North
America, South America, Japan and Israel. Any failure by SAG to distribute
such products in a timely and effective manner could have a material adverse
effect on the Company's business, financial condition and results of
operations.
TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
The Company's success will depend in part on its ability to acquire and
develop product enhancements and new products that keep pace with continuing
changes in technology and evolving customer preferences, and the timely
delivery of products and product enhancements from SAG. The process of
developing new high-technology products is inherently complex and uncertain
and requires innovative designs anticipating customer demands and
technological trends. There can be no assurance that the Company will be
successful in acquiring and/or developing product enhancements or new products
to adequately address changing technologies, that it can introduce such
products or enhancements on a timely basis, that such products or enhancements
will be successful in the marketplace or that SAG will deliver new products or
product enhancements that will be successful in the marketplace in a timely
manner. The Company's failure to acquire and/or develop technological
improvements or to adapt its products to technological change may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The timely delivery of new products or product enhancements will depend in
part on the Company's ability to continue to develop its internal research and
development capability. The Company's ability to staff and effectively manage
any future growth in its research and development organization will require it
to continue to improve its operational, financial and management controls and
reporting systems and procedures, and to hire, train, motivate and manage its
research and development employees. There can be no assurance that the Company
will be able to manage these challenges in an efficient or timely manner. If
management of the Company is unable to manage growth effectively, the
Company's business, financial condition and results of operations could be
materially adversely affected.
DEPENDENCE ON THE YEAR 2000 MARKET
The Company believes that its future growth depends, in part, on increased
demand for the Company's products and professional services relating to the
resolution of the year 2000 problem. The Company had no revenues from its year
2000 program for the year ended December 31, 1996. For the year ended December
31, 1997, the Company had revenues of $6.9 million from its year 2000 program.
Although the Company believes that the market for products and professional
services relating to the year 2000 problem will grow as the year 2000
approaches, there can be no assurance that this market will develop to the
extent anticipated by the Company. Significant expenses for sales and
marketing may be required to educate potential clients of the year 2000
problem and the need for products and professional services addressing the
problem. In addition, there can
8
<PAGE>
be no assurance that potential clients will understand or acknowledge the
problem. Affected organizations may not be willing or able to allocate the
resources, financial or otherwise, to address the year 2000 problem in a
timely manner. Many organizations may attempt to resolve the problem
internally rather than by contracting with outside firms such as the Company
and value added integrators to which the Company may license its software
products. Other organizations may elect to replace their existing systems with
year 2000 compliant hardware and software, rather than incur substantial cost
in making their existing systems year 2000 compliant. In addition, there can
be no assurance that a competitor will not develop a fully automated solution
to the year 2000 problem. Due to these and other factors, development of the
market for the Company's year 2000 products and professional services is
uncertain and unpredictable.
In addition, the Company anticipates that demand for products and
professional services that address the year 2000 problem will decline, perhaps
rapidly, following the year 2000. If the market for year 2000 products and
professional services fails to grow, or grows more slowly than anticipated,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, competition for personnel
qualified to perform professional services relating to the year 2000 problem
is intense, and there can be no assurance that the Company will be able to
retain its employees who provide such professional services or be able to
attract and retain such personnel in the future.
YEAR 2000 COMPLIANCE
The Company is in the process of identifying, evaluating and implementing
changes to its computer programs and systems necessary to address the year
2000 issue. The issue affects computer programs sold to customers as well as
computer programs used by the Company internally. The Cooperation Agreement
requires SAG to ensure that its products are year 2000 compliant in accordance
with a specified timetable. Although SAG has delayed the timetable set forth
in the Cooperation Agreement for certain products, SAG has subsequently
delivered most of the year 2000 compliant products set forth in the
Cooperation Agreement. As of April 21, 1998, there remain certain products,
none of which is significant to the Company, that are not year 2000 compliant,
and the Company is awaiting delivery of these products from SAG. There can be
no assurance that SAG will deliver compliant versions of the remaining
products in a timely manner. In addition, the Company has identified a few
products that are compliant but are not compatible with all of the Company's
other year 2000 compliant products. Although these delays and non-
compatibility problems have had no material impact on the Company to date, any
failure by SAG to deliver the remaining products and resolve the compatibility
issue of the products in a timely manner could have a material adverse effect
on the Company's business, financial condition and results of operations.
RELIANCE ON ACQUISITIONS
The Company believes that its future growth will depend, in part, on its
ability to successfully identify, acquire and then develop promising
technologies and products. In addition, the Company intends to build its
product development staff in part through acquisitions. The integration of
future acquisitions into the Company's existing business could result in
certain unanticipated difficulties that could require a disproportionate
amount of management's attention and the Company's resources. Furthermore,
there can be no assurance that the anticipated benefits of any future
acquisition will be realized. The Company has limited experience in completing
acquisitions and integrating acquired technologies or products into its
operations. The Company may compete for future acquisition opportunities with
other companies that have significantly greater financial and management
resources and there can be no assurance that the Company will be successful in
identifying, acquiring and developing products and technology. Acquisitions
could also have adverse short-term effects on the Company's operating results,
and could result in dilutive issuances of equity securities and the incurrence
of debt and contingent liabilities. In addition, many business acquisitions
must be accounted for as purchases and, because most software-related
acquisitions involve the purchase of significant intangible assets, these
acquisitions typically result in substantial amortization charges and may also
involve charges for acquired research and development projects, which could
have a material adverse effect on the Company's operating results. See
"Company Background."
9
<PAGE>
MANAGEMENT OF PROFESSIONAL SERVICES GROWTH
The Company recently has experienced a period of growth in its professional
services business, with revenues from such business increasing from $35.0
million for the year ended December 31, 1996 to $44.4 million for the year
ended December 31, 1997. The Company's ability to staff and effectively manage
any future growth in this business will require it to continue to improve its
operational, financial and management controls and reporting systems and
procedures, and to hire, train, motivate and manage its professional services
employees. There can be no assurance that the Company will be able to manage
these challenges in an efficient or timely manner. If management of the
Company is unable to manage growth effectively, the Company's business,
financial condition and results of operations could be materially adversely
affected.
DEPENDENCE ON CUSTOMER BASE
Most of the Company's sales are made to its existing customers. Customers
typically pay a one-time licensing fee for use of the Company's products and
generally pay an annual charge for maintenance services which include software
updates and technical support. There can be no assurance that customers will
continue to purchase the Company's products and services, that the Company's
historic maintenance renewal rates will continue, or that the Company will be
able to maintain its current pricing levels for products and maintenance
services. Customers' decisions not to renew their maintenance agreements or to
renew them on different terms could have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON MAINFRAME COMPUTING ENVIRONMENT
The majority of the Company's products are purchased by customers using IBM
and IBM-compatible mainframe computing platforms. Worldwide, an increasing
proportion of computing functions are being performed on alternative computing
platforms, including mid-range computers and client/server networks. A
significant shift in the way the Company's customers use computing platforms
may have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, although the Company
believes that any migration away from mainframe computing platforms is
subsiding as a result of more cost effective mainframe technology and other
factors, any further significant reduction in the role of mainframe or other
legacy systems could have a material adverse effect on the Company's business,
financial condition and results of operations.
PROPRIETARY RIGHTS
The Company's success is dependent to a significant extent on its ability to
protect its proprietary rights. The Company has no patents and depends upon a
combination of trade secret, copyright and trademark laws, license agreements,
nondisclosure, assignment of invention and other contractual provisions, and
various security measures to protect its proprietary rights. The Company is
also dependent on SAG and other third parties that license products to the
Company to protect their respective proprietary rights in such products. There
can be no assurance that the legal protections afforded to, or the precautions
taken by, the Company or its third-party licensors will be adequate to prevent
misappropriation of their respective proprietary rights. In addition, these
protections do not prevent independent third-party development of functionally
equivalent or superior technologies, products or professional services. Any
infringement or misappropriation of the Company's proprietary rights, or those
of its third-party licensors, could have a material adverse effect on the
Company's business, financial condition and results of operations.
In the future, litigation may be necessary to enforce and protect the
Company's trade secrets, copyrights and other intellectual property or
proprietary rights. The Company may also be subject to litigation to defend
against claimed infringement of, or to determine the scope and validity of,
the intellectual property or proprietary rights of others. In the event of
litigation involving the use of technology by the Company, the Company could
be required to expend significant resources to develop non-infringing
technology or to obtain licenses to technology involved in litigation. There
can be no assurance that the Company would be successful in such development
or that any such licenses would be available on commercially reasonable terms,
if at all. Although
10
<PAGE>
the Company is not aware of any claims that its products, trademarks or other
proprietary rights infringe on the proprietary rights of third parties, there
can be no assurance that third parties will not assert infringement claims
against the Company and that such claims will not have a material adverse
effect on the Company's business, financial condition and results of
operations. Any litigation involving the use of technology by the Company
could result in substantial cost to the Company and divert management's
attention from the Company's operations, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties or
prevent the Company from selling its products, any one of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Proprietary Rights."
DEPENDENCE ON THIRD-PARTY TECHNOLOGY
The Company's products are currently designed, and may in the future be
designed, to work on or in conjunction with certain third-party hardware
and/or software products. If any of these current or future third parties were
to discontinue making their products available to the Company or to licensees
of the Company's products on a timely basis, or to increase materially the
cost to the Company or its licensees to acquire, license or purchase such
third parties' products, or if a material problem were to arise in connection
with the ability of the Company's products to properly use or operate with
third-party hardware and/or software products, the Company's products would
have to be redesigned by the Company, or the licensor of the product to the
Company, to function with or on alternative third-party products, or the
Company or its licensees may be precluded from selling the product. There can
be no assurance that an alternative source of suitable technology would be
available or that the Company, or the licensor of the product to the Company,
would be able to develop an alternative product on a timely basis or at a
reasonable cost. The failure of the Company to license, acquire or develop
alternative technologies or products on a timely basis and at a reasonable
cost could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The markets for the Company's software products and professional services
are highly competitive and characterized by continual change and improvement
in technology. The Company provides products and professional services to
several markets within the computer industry and encounters a variety of
competitors within each market. Many of the Company's competitors have
significantly greater financial, marketing and other competitive resources
than the Company. In addition, in certain markets in which the Company
competes, there are no significant barriers to entry.
In the enterprise development markets, the Company's competitors with
respect to enterprise and departmental database management products include
IBM Corporation ("IBM"), Oracle Corporation ("Oracle"), Informix Corporation
("Informix"), Sybase, Inc. ("Sybase") and Microsoft Corporation ("Microsoft").
In addition, the Company's 4GL applications programming language, NATURAL,
competes with offerings from both large and small companies, including Oracle,
Microsoft, IBM and Sterling Software, Inc. In the enterprise enablement
market, the Company's products compete in both the component/object and the
message-oriented segments of the middleware market, where its competitors
include IBM and Microsoft. In the market for year 2000 products and
professional services, the Company's competitors include Formal Systems, Inc.,
Viasoft, Inc. and Electronic Data Systems Corporation. Few of the Company's
competitors compete in all of the same markets as the Company.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and its failure to do so
would have a material adverse effect upon the Company's business, financial
condition and results of operations. In addition, no assurance can be given
that the Company will not be required to make substantial additional
investments in connection with its research, development, marketing, sales and
customer service efforts in order to meet any competitive threat, or that such
required investments will not have a material adverse effect on operating
margins. Increased competition could result in reduction in market share,
pressure for price reductions and related reductions in gross margins, any of
which could materially adversely affect the Company's business, financial
condition and results of operations.
11
<PAGE>
RISK ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
The Company holds the exclusive and perpetual right to license SAG products
in North America, South America, Japan and Israel. In South America, Japan and
Israel, the Company has entered into exclusive distributorship arrangements
with local firms. There can be no assurance that such distributors will
continue to perform as they have historically and that they will not offer
products that compete with the Company's products. Additionally, the
distributorships generally may be terminated by either party at any time upon
compliance with applicable notice provisions. In the event that any of the
distributorships were terminated or expired, there can be no assurance that
the Company could find an adequate replacement, and such a termination or
expiration could have a material adverse effect on the Company's business,
financial condition and results of operations.
Royalty revenues from international distributors represented 14%, 17% and
15% of the Company's total revenues in 1995, 1996 and 1997, respectively. The
Company anticipates that royalty revenues from international sales and
services will continue to account for a material portion of its total revenues
in the foreseeable future. As a result, the Company may be subject to certain
risks associated with international operations, including risks associated
with foreign currency exchange rate fluctuations and risks associated with the
application and imposition of protective legislation and regulations relating
to import or export (including export of high technology products) or
otherwise resulting from foreign policy or the variability of foreign economic
conditions. To date, the Company has not engaged in any hedging transactions
to mitigate its risks relating to exchange rate fluctuations.
Additional risks associated with international operations include costs of
localizing products for foreign countries, lack of acceptance of localized
products in foreign countries, difficulties in enforcing intellectual
property, proprietary and contract rights, the burdens of complying with a
wide variety of foreign laws, potentially adverse tax consequences, tariffs,
quotas and other barriers, and potential difficulties in collecting accounts
receivable. There can be no assurance that these and other factors will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISK OF SOFTWARE DEFECTS
Software products as complex as those offered by the Company frequently
contain errors or defects, especially when first introduced or when new
versions or enhancements are released. Despite product testing, new products
may contain defects or software errors and, as a result, the Company may
experience delayed or lost revenues during the period required to correct any
defects or errors. Any such defects or errors could result in adverse customer
reactions, negative publicity regarding the Company and its products, harm to
the Company's reputation, or loss of or delay in market acceptance, or could
require expensive product changes, any of which could have a material adverse
effect upon the Company's business, financial condition and results of
operations. The Company's Cooperation Agreement with SAG provides for only
limited warranties by SAG with respect to the software products licensed by it
to the Company and, therefore, the Company may be primarily liable to its
customers for defects in SAG-supplied software.
POTENTIAL FOR CONTRACT LIABILITY
The Company markets its products and professional services to customers for
developing, building, deploying, maintaining and managing mission-critical
computer software applications. The Company's license and other agreements
with its customers typically contain provisions designed to limit the
Company's exposure to potential liability claims relating to the Company's
products or professional services. Despite this precaution, there can be no
assurance that the limitations of liability set forth in the Company's
agreements would be enforceable or would otherwise protect the Company from
liability for damages. Although the Company has not experienced any material
liability claims to date, the sale and support of the Company's products and
professional services may entail the risk of such claims, which could be
substantial in light of the use of such products in mission-critical
applications. A material liability claim against the Company, regardless of
its outcome, could result in substantial cost to the Company and divert
management's attention from the Company's
12
<PAGE>
operations. Therefore, any material liability claim could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON STATE, LOCAL AND OTHER GOVERNMENT CONTRACTS
The Company derived 24% of its total revenues in 1996 and 30% of its total
revenues for 1997 from selling its products and professional services directly
or indirectly to state and local government agencies. In addition, the Company
derived 9% of its total revenues in 1996 and 11% of its total revenues for
1997 from selling its products and professional services directly or
indirectly to federal government agencies. Any failure to obtain a contract
award, or a delay on the part of a government agency in making the award or in
ordering products and professional services under an awarded contract, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Other risks generally involved in government sales
include the larger discounts (and thus lower margins) typically involved in
government sales, the dependence of the Company on the ability of a prime
contractor, if any, to obtain the award and perform the contract, the
unpredictability of funding for various government programs, the ability of
the government agency to unilaterally terminate the contract, and the
dependence on the creditworthiness of any prime contractor (some of which are
relatively small organizations without substantial funds). The Company
anticipates that state, local and other government sales will continue to
represent a significant but fluctuating portion of its revenues in the future.
FIXED PRICE CONTRACTS
Revenues from fixed price contracts represented approximately 8% and 12% of
the Company's total revenues for 1996 and 1997, respectively. In making
proposals for fixed price contracts, the Company relies on its estimated costs
for completing the project. These estimates reflect, among other factors,
judgments as to the efficiencies of the Company's technology and services as
applied to the project. Any increased or unexpected costs or unanticipated
delays in connection with the performance of fixed price contracts could have
a material adverse effect on the Company's business, financial condition and
results of operations. In the past, the Company has suffered material losses
on fixed price contracts.
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL PERSONNEL
The Company's future performance depends to a significant degree upon the
continued service of the key members of its management, as well as marketing,
sales, consulting and product development personnel, and its ability to
attract and retain new management and other personnel. The loss of any one or
more of the Company's key personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. Company
employees are employed at-will and the Company has no fixed-term employment
agreements with any of its employees.
While historically the Company primarily has relied on SAG for product
development, the Company believes its future success will also depend in part
upon its ability to develop its own technologies and products and,
consequently, upon its ability to attract and retain highly skilled technical
and product development personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its key
employees or that it will be successful in attracting, integrating and
retaining new personnel in the future. Failure to attract, integrate and
retain such personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, at March
31, 1998, the Company had approximately 112 independent contractors working as
technical consultants primarily in connection with the Company's professional
service offerings. Competition for such contractors is intense and the failure
to continue to attract and hire such contractors when they are needed could
have a material adverse effect on the Company's business, financial condition
and results of operations.
CONTROL BY OFFICERS, DIRECTORS AND THAYER
Following the Offering, the Company's officers and directors, and their
affiliates, in the aggregate, will have voting control of approximately 51.1%
of the Company's outstanding Common Stock. In particular, Thayer and its
affiliates will have voting control of approximately 38.8% of the Company's
outstanding Common Stock.
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<PAGE>
As a result, these stockholders will be able to control all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. The voting power of Thayer and the
Company's officers and directors under certain circumstances could have the
effect of preventing or delaying a change in control of the Company. See
"Principal and Selling Stockholders."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS
The Company's Second Amended and Restated Certificate of Incorporation and
Third Amended and Restated Bylaws contain certain provisions that may have the
effect of discouraging a third party from making an acquisition proposal for
the Company. Such provisions could limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock. The
Company has an authorized class of 25,000,000 shares of preferred stock, $0.01
par value, that the Board of Directors may issue, without stockholder
approval, with voting, conversion and other rights and preferences that may be
superior to the Common Stock and that could adversely affect the voting power
or other rights of the holders of Common Stock. The issuance of Preferred
Stock or of rights to purchase Preferred Stock could be used to discourage an
unsolicited acquisition proposal. Other provisions impose various procedural
and other requirements that could make it more difficult for shareholders to
effect certain corporate actions. In addition, the Company's Board of
Directors is divided into three classes, the members of each of which will
serve for a staggered three-year term, which may make it more difficult for a
third party to gain control of the Company's Board of Directors. Certain
provisions of the Cooperation Agreement with SAG may also have the effect of
discouraging a third party from making an acquisition proposal for the
Company. See "Company Background" and "Description of Capital Stock--Certain
Provisions of Delaware Law, the Certificate of Incorporation and the Bylaws."
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price for the Common Stock may be volatile and may be affected by
a number of factors, including the announcement of new products, product
enhancements or services by the Company or its competitors, quarterly
variations in the Company's or its competitors' results of operations, changes
in earnings estimates or recommendations by securities analysts, developments
in the Company's industry, general market conditions and other factors,
including factors unrelated to the operating performance of the Company or its
competitors. In addition, stock prices for many companies in the technology
sector have experienced wide fluctuations that often have been unrelated to
the operating performance of such companies. Such factors and fluctuations, as
well as general economic, political and market conditions, such as recessions,
may materially adversely affect the market price of the Company's Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
29,917,453 shares of Common Stock. Assuming no exercise of the Underwriters'
over-allotment option, of these shares, 14,331,603 shares will be freely
tradable without restriction in the public market. Of the remaining 15,585,850
shares, (i) 14,437,586 shares will be eligible for sale beginning May 18, 1998
upon the expiration of the lock-up agreements entered into in connection with
the IPO (11,636,574 of which will be subject to 90-day lock-up agreements
between certain stockholders and the Representatives of the Underwriters),
(ii) 375,141 shares will be eligible for sale beginning June 30, 1998 (185,666
of which will be subject to a 90-day lock-up agreement between the holder
thereof and the Representatives of the Underwriters), (iii) 137,500 shares
will be eligible for sale beginning August 22, 1998 and (iv) 51,013 shares and
108,625 shares will be eligible for sale beginning January 10, 1999 and April
11, 1999, respectively. BancAmerica Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. Sales of substantial amounts of
Common Stock or the availability of such shares for sale could adversely
affect prevailing market prices of the Common Stock. See "Shares Eligible for
Future Sale" and "Underwriting."
DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
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<PAGE>
COMPANY BACKGROUND
In February 1981, the Company was incorporated as a Delaware corporation and
established as a holding company for Software AG Americas, Inc. Since 1973,
Software AG Americas, Inc. has primarily licensed and serviced SAG products in
the United States and other countries through a series of licensing agreements
with SAG. In June 1981, the Company sold approximately 30% of its then
outstanding common stock in an initial public offering. In 1988, SAG purchased
all of the outstanding stock of the Company, thereby acquiring control of the
Company.
On March 31, 1997, the Company consummated the Recapitalization, pursuant to
which the senior management of the Company and Thayer acquired approximately
89% of the Company's then outstanding Common Stock. Thayer is a private equity
fund based in Washington, D.C. that targets investments in the information
technology and services industries and its investors include corporations,
pension funds and financial institutions. The Company believes that the
Recapitalization has provided several significant benefits to the Company,
such as access to growth and development capital, equity ownership incentives
for management and other key employees, and the opportunity and ability to
pursue acquisitions and internal product development.
Immediately prior to the Recapitalization, the Company and SAG entered into
the Cooperation Agreement which generally (i) provides the Company the
exclusive and perpetual right to license and service in North America, South
America, Japan and Israel (the "Territory") both existing and future products
developed or acquired by SAG and (ii) provides SAG the exclusive and perpetual
right to license and service outside the Territory both existing and future
products developed or acquired by the Company. Each of the Company and SAG
must pay the other 24% of the net revenues derived from such licenses. This
24% royalty rate is fixed for 20 years. Except under certain circumstances,
the Company's minimum annual royalty payment to SAG through the year 2000 must
equal at least $21 million. In 1994, 1995 and 1996, the Company's aggregate
royalty payments to SAG were approximately $29.0 million, $23.9 million and
$26.1 million, respectively. See "Certain Relationships and Transactions." The
Company anticipates that the Cooperation Agreement and SAG's equity interest
in the Company will promote close collaboration between the Company and SAG.
See "Principal and Selling Stockholders."
The Cooperation Agreement contains certain safeguards to ensure that the
Company and SAG are able to continue to exercise their respective rights to
license and service each other's products in their respective territories.
These safeguards include rights of first refusal with respect to transfers of
proprietary rights to third parties and restrictions on SAG from competing
against the Company in the Territory and on the Company from competing against
SAG outside the Territory. The Cooperation Agreement also prohibits either
party from consummating a change of control unless such party's successor
agrees to be bound by the terms of the Cooperation Agreement with respect to
all existing products of such party and future products that are materially
derived therefrom. In addition, SAG is precluded from consummating a change of
control unless its successor agrees to continue supporting the research and
development of SAG's then existing and planned products for two years
following the change in control. The Company is precluded from consummating a
change in control in which certain specified entities would be its successor
unless such entities agree to pay the Company's minimum annual royalty
payments to SAG until the later of December 31, 2000 or two years following
the change in control.
On November 21, 1997, the Company, Thayer and an affiliate of Thayer
consummated the sale of 8,855,000 shares of Common Stock in an initial public
offering (the "IPO"). Following the IPO, Thayer and an affiliate of Thayer
owned approximately 56% of the Company's outstanding Common Stock and SAG
owned approximately 9% of the Company's then outstanding Common Stock.
On September 30, 1997, the Company acquired R.D. Nickel and Associates, Inc.
("R.D. Nickel"), a software company that develops, licenses and supports a
family of application development products, including CONSTRUCT and CONSTRUCT
Spectrum. Additionally, R.D. Nickel served as the exclusive distributor of the
Company's products in Canada since 1973. R.D. Nickel now operates as Software
AG Systems (Canada) Inc., an indirect subsidiary of the Company.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders in the Offering.
DIVIDEND POLICY
The Company did not pay any cash dividends in 1997 and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. In
1996, while a wholly owned subsidiary of SAG, the Company paid aggregate cash
dividends to SAG of $9.0 million.
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CAPITALIZATION
The following table sets forth as of March 31, 1998, the capitalization of
the Company. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(IN THOUSANDS)
<S> <C>
Stockholders' equity:
Preferred Stock, $0.01 par value; 25,000,000 shares authorized;
none issued and outstanding................................... $ --
Common Stock, $0.01 par value; 75,000,000 shares authorized;
29,523,149 shares issued and outstanding (1).................. 295
Additional paid-in capital..................................... 84,291
Retained earnings.............................................. 10,657
-------
Total stockholders' equity................................... 95,243
-------
Total capitalization....................................... $95,243
=======
</TABLE>
- --------
(1) Excludes (i) 8,242 shares of Common Stock issued upon the exercise of
stock options subsequent to March 31, 1998 granted under the Option Plan
at a weighted average exercise price of $1.47, (ii) 5,065,647 shares of
Common Stock issuable upon the exercise of stock options outstanding as of
April 17, 1998, granted under the Option Plan at a weighted average
exercise price of $5.46 per share and (iii) 1,791,107 shares of Common
Stock reserved for future issuance pursuant to the Option Plan.
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<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NYSE under the symbol AGS since
November 18, 1997. The following table sets forth the high and low sales
prices, as reported on the NYSE, for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
Fourth Quarter (from November 18, 1997)................... $14 1/2 $10
1998
First Quarter............................................. 27 1/4 11 1/8
Second Quarter (through April 17, 1998)................... 28 1/16 25 1/2
</TABLE>
On April 17, 1998, the last sale price of the Common Stock, as reported by
the NYSE, was 27 7/16 per share. As of April 13, 1998, the Company had
approximately 42 common stockholders of record.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data set forth below for each of
the years ended December 31, 1995, 1996 and 1997 and the consolidated balance
sheet data as of December 31, 1996 and 1997 have been derived from the
Company's consolidated financial statements, which statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants,
and are included elsewhere in this Prospectus. The consolidated statement of
operations data for the year ended December 31, 1994 and the consolidated
balance sheet data at December 31, 1994 and 1995 have been derived from the
Company's consolidated financial statements, which statements have been
audited by KPMG Peat Marwick LLP and are not included in this Prospectus. The
financial data presented as of and for the year ended December 31, 1993 are
derived from the Company's financial statements, which statements have been
audited by other auditors and are not included in this Prospectus. The
financial data presented as of March 31, 1998 and for the three months ended
March 31, 1998 are derived from unaudited consolidated financial statements
included elsewhere in this Prospectus, which, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial data for such periods. The results
of operations for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the full year or for any future
period. The selected consolidated financial data set forth below should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Prospectus. The
historical financial data set forth below for the periods ended, or as of the
dates prior to, March 31, 1997 reflect the results of operations and balance
sheet data of the Company prior to the Recapitalization when the Company was a
wholly owned subsidiary of SAG and is captioned as "Predecessor." The
historical financial information subsequent to March 31, 1997 reflect the
results of operations and balance sheet data subsequent to the
Recapitalization and is captioned as "Successor." See "Company Background."
19
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1) PREDECESSOR SUCCESSOR
------------------------------------ ------------ ----------- -----------------
THREE NINE THREE
MONTHS MONTHS MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED
------------------------------------------------- MAR. 31, DEC. 31, MAR. 31,
1993 1994 1995 1996 1997 1997 1997 1998
-------- -------- -------- -------- ------------ ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software license fees.. $ 51,672 $ 51,832 $ 52,061 $ 52,163 $ 64,137 $ 7,341 $ 56,796 $21,649
Maintenance fees....... 57,264 65,871 65,307 69,702 72,689 17,352 55,337 19,800
Professional service
fees.................. 31,175 29,552 35,194 34,975 44,398 9,948 34,450 14,414
-------- -------- -------- -------- -------- -------- -------- -------
Total revenues......... 140,111 147,255 152,562 156,840 181,224 34,641 146,583 55,863
-------- -------- -------- -------- -------- -------- -------- -------
Cost of revenues:
Software license....... 14,331 13,513 15,244 14,120 19,909 2,098 17,811 5,670
Maintenance............ 29,796 29,823 23,488 25,885 28,764 6,205 22,559 7,057
Professional services.. 25,835 26,490 32,591 32,966 37,567 9,211 28,356 11,501
-------- -------- -------- -------- -------- -------- -------- -------
Total cost of reve-
nues.................. 69,962 69,826 71,323 72,971 86,240 17,514 68,726 24,228
-------- -------- -------- -------- -------- -------- -------- -------
Gross profit............ 70,149 77,429 81,239 83,869 94,984 17,127 77,857 31,635
-------- -------- -------- -------- -------- -------- -------- -------
Operating expenses:
Software product devel-
opment................ 3,045 900 900 1,372 1,093 -- 1,093 755
Sales and marketing.... 43,439 50,422 52,512 48,677 38,320 7,317 31,003 11,873
Administrative and gen-
eral.................. 28,636 25,212 24,639 28,539 35,758 8,500 27,258 10,805
Write-off of acquired
in-process research
and development costs
(2)................... -- -- -- -- 6,051 -- 6,051 --
-------- -------- -------- -------- -------- -------- -------- -------
Total operating ex-
penses................ 75,120 76,534 78,051 78,588 81,222 15,817 65,405 23,433
-------- -------- -------- -------- -------- -------- -------- -------
Income (loss) from oper-
ations................. (4,971) 895 3,188 5,281 13,762 1,310 12,452 8,202
Other income and ex-
pense, net............. 7,599 1,882 2,449 5,230 1,995 978 1,017 906
-------- -------- -------- -------- -------- -------- -------- -------
Income before cumulative
effect of change in
accounting principle
and income taxes....... 2,628 2,777 5,637 10,511 15,757 2,288 13,469 9,108
Cumulative effect of
change in accounting
principle.............. 5,070 -- -- -- -- -- -- --
Income tax provision.... 1,318 1,395 2,311 4,302 9,046 915 8,131 3,718
-------- -------- -------- -------- -------- -------- -------- -------
Net income.............. $ 6,380 $ 1,382 $ 3,326 $ 6,209 $ 6,711 $ 1,373 $ 5,338 $ 5,390
======== ======== ======== ======== ======== ======== ======== =======
Net income per common
share (3):
Income from continuing
operations............ $ 0.05 $ 0.05 $ 0.12 $ 0.23 $ 0.27 $ 0.06 $ 0.21 $ 0.18
Cumulative effect of
change in accounting
principle............. 0.18 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
$ 0.23 $ 0.05 $ 0.12 $ 0.23 $ 0.27 $ 0.06 $ 0.21 $ 0.18
======== ======== ======== ======== ======== ======== ======== =======
Net income per common
share--assuming
dilution (3):
Income from continuing
operations............ $ 0.05 $ 0.05 $ 0.11 $ 0.21 $ 0.25 $ 0.05 $ 0.20 $ 0.17
Cumulative effect of
change in accounting
principle............. 0.17 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
$ 0.22 $ 0.05 $ 0.11 $ 0.21 $ 0.25 $ 0.05 $ 0.20 $ 0.17
======== ======== ======== ======== ======== ======== ======== =======
Dividends............... $ -- $ 600 $ 1,700 $ 9,000 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------- ------------------
DECEMBER 31,
------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital (defi-
cit)................... $ 6,355 $ 5,167 $ (2,465) $ 30,421 $ 62,052 $ 65,429
Total assets............ 74,175 86,466 125,612 158,088 196,126 199,600
Long-term debt, less
current maturities..... 3,212 431 -- -- -- --
Total stockholders' eq-
uity................... 30,190 30,972 32,599 29,808 89,818 $ 95,243
</TABLE>
- --------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
the Recapitalization) and for the nine months ended December 31, 1997
(subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
the year ended December 31, 1997 relates to the Company's acquisition of
R.D. Nickel. Before deducting the nonrecurring write-off for this combined
period, income from operations was $19.8 million, net income was $12.8
million and basic and diluted net income per common share were $0.51 and
$0.48, respectively.
(3) In accordance with Statement of Financial Accounting Standard No. 128
"Earnings Per Share" ("SFAS No. 128") issued by the Financial Accounting
Standards Board, the Company calculated and presented basic and diluted
earnings per share for the current period. The Company also retroactively
adopted SFAS No. 128 for all prior periods presented in calculating and
presenting the earnings per share. Basic earnings per share is based on
income available to common stockholders divided by the weighted average
number of common shares outstanding. Diluted earnings per share is also
based on income available to common stockholders divided by the sum of the
weighted average number of common shares outstanding and all potential
common shares which are dilutive. See Note 1 of Notes to Consolidated
Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "Risk Factors."
OVERVIEW
The Company is an enterprise solutions company that provides robust software
products and related professional services to large organizations with complex
computing requirements. The Company's revenues are primarily derived from
license fees for the use of software products, fees for maintenance related to
those products and fees for professional services. Since 1973, the Company has
primarily licensed and serviced SAG products in the United States and other
countries through a series of licensing agreements with SAG. In 1981, the
Company sold approximately 30% of its outstanding Common Stock in an initial
public offering. In 1988, SAG purchased all of the outstanding Common Stock of
the Company, thereby acquiring control of the Company.
Immediately prior to the consummation of the Recapitalization, the Company
entered into a perpetual (unless otherwise terminated by the written agreement
of the parties) Cooperation Agreement with SAG that terminated and superseded
the license agreement dated January 1, 1995. As consideration for the
Cooperation Agreement, the Company paid SAG approximately $22.6 million. Under
the Cooperation Agreement, each of the Company and SAG are required to pay the
other royalties of 24% of net revenues from sales of licenses of, and
technical services on, each other's products for the initial 20 years of the
perpetual term of the agreement. For calendar years 1997 through 2000, the
Company will be required to pay SAG minimum annual royalties of $21.0 million,
provided that SAG's worldwide product and technical services revenues for each
of those years are at least equal to SAG's 1996 worldwide revenues. In the
event of a decrease in SAG's worldwide revenues, the minimum annual royalty
requirement will be reduced proportionately.
Pursuant to the Recapitalization, the determination of fair value allocated
to the identifiable assets and liabilities of the Company has been made by
management based on the nature of the assets and liabilities acquired, and
general economic factors. Based on this allocation, the fair value of the
Company's Cooperation Agreement has been recorded at $23.5 million, based on
an independent appraisal. The amortization period for the Cooperation
Agreement is ten years. The fair value of the Company's remaining assets and
liabilities has been presumed to be equal to the book value as of the date of
the acquisition. Based on allocation of the purchase price to the net assets
and liabilities, an excess of purchase price over net assets acquired
(goodwill) of $6.4 million was recorded. Such goodwill is being amortized on a
straight-line basis over 10 years.
Prior to the Recapitalization, the Company's management team was constrained
by SAG in its ability to develop new products, license third-party software,
retain capital for expansion and make acquisitions of companies, products or
technologies. The Company's relatively low software product development
expenditures resulted, in part, from these constraints. Management has
undertaken several strategic initiatives since the Recapitalization to
increase revenue growth and profitability, including building a product
development organization, developing a product and professional services
offering that addresses the year 2000 problem and acquiring R.D. Nickel.
On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel. The transaction was
accounted for using the purchase method of accounting for a business
combination. The aggregate purchase price of Cdn$14.0 million (US$10.1
million) was funded through a cash payment of Cdn$7.0 million (US$5.1 million)
and a note payable of Cdn$7.0 million (US$5.1 million). The note payable was
repaid in November 1997 with the proceeds from the IPO. In connection with the
acquisition, the Company recorded a $6.1 million non-recurring charge against
earnings for in-process research and development costs. The remaining excess
purchase price of $5.0 million represents goodwill, and has been recorded as
other
22
<PAGE>
intangible assets. The related amortization period for the goodwill is ten
years. At March 31, 1998, accumulated amortization of the goodwill was
approximately $250,000. At September 30, 1997, the net assets acquired have
been reported in the Company's consolidated financial statements. As of
October 1, 1997, the operating results of R.D. Nickel have been consolidated
with the Company's operating results.
Software license fees are generated through the licensing of enterprise
development and enterprise enablement products. Enterprise development
products include ADABAS, a high-performance data management system, and
NATURAL, a 4GL programming language. Enterprise enablement software products
include ENTIRE, a family of middleware products, and INSIGHT 2000 Tool Kit, a
software product that addresses the year 2000 problem.
The Company also provides maintenance and support services to its customers.
Such maintenance services are typically provided in accordance with annual
agreements, with maintenance fees charged as a percentage of current software
license fees. Maintenance fees are recognized ratably over the term of the
agreement.
The Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in the Territory.
In North America, a direct sales and support structure is utilized through the
Company's wholly owned subsidiaries. In the remainder of the Territory,
exclusive distributors sell the Company's products and provide maintenance
support and pay the Company a royalty on the revenues derived therefrom. The
Company has historically generated the majority of its revenues from sales
within the United States. Royalty revenues from international distributors
represented 14%, 17% and 15% of the Company's total revenues in 1995, 1996 and
1997, respectively.
The Company also generates revenues through the provision of professional
services associated with the implementation and deployment of the Company's
enterprise development and enterprise enablement products and through
educational services. The Company recognizes revenue from professional
services as such services are performed. The Company's professional services
offerings include consulting, software integration, system implementation,
large project management and year 2000 analysis and remediation. These
services are delivered on either a time and materials basis or a fixed price
basis.
The Company offers its products and professional services to certain
customers under Enterprise License Agreements ("ELAs"). ELAs are typically
long-term contracts of three to five years which include software products,
professional services and maintenance support. Revenues from software licenses
sold as part of an ELA are recognized as revenue when such products are
shipped. Revenue from professional services and maintenance support are
recognized as provided. As of March 31, 1998, 133 of the Company's customers
had entered into ELAs with the Company.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1) PREDECESSOR SUCCESSOR
-------------------------- ------------ ----------- -----------------
THREE NINE THREE
YEAR MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, DEC. 31, MAR. 31, DEC. 31, MAR. 31,
-------------------------- ------------ ----------- -------- --------
1993 1994 1995 1996 1997 1997 1997 1998
----- ----- ----- ----- ------------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.. 36.9% 35.2% 34.1% 33.3% 35.4% 21.2% 38.7% 38.8%
Maintenance fees....... 40.9 44.7 42.8 44.4 40.1 50.1 37.8 35.4
Professional service
fees.................. 22.2 20.1 23.1 22.3 24.5 28.7 23.5 25.8
----- ----- ----- ----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Software license....... 10.2 9.2 10.0 9.0 11.0 6.1 12.2 10.2
Maintenance............ 21.3 20.3 15.4 16.5 15.9 17.9 15.4 12.6
Professional services.. 18.4 18.0 21.4 21.0 20.7 26.6 19.3 20.6
----- ----- ----- ----- ----- ----- ----- -----
Total cost of reve-
nues.................. 49.9 47.5 46.8 46.5 47.6 50.6 46.9 43.4
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 50.1 52.5 53.2 53.5 52.4 49.4 53.1 56.6
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Software product
development........... 2.2 0.6 0.6 0.9 0.6 -- 0.7 1.3
Sales and marketing.... 31.0 34.2 34.4 31.0 21.1 21.1 21.2 21.3
Administrative and
general............... 20.4 17.1 16.2 18.2 19.7 24.5 18.6 19.3
Write-off of acquired
in-process research
and development costs
(2)................... -- -- -- -- 3.4 -- 4.1 --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses.............. 53.6 51.9 51.2 50.1 44.8 45.6 44.6 41.9
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (3.5) 0.6 2.0 3.4 7.6 3.8 8.5 14.7
Other income and
expense, net........... 5.4 1.3 1.6 3.3 1.1 2.8 0.7 1.6
----- ----- ----- ----- ----- ----- ----- -----
Income before cumulative
effect of change in
accounting principle
and income taxes....... 1.9 1.9 3.6 6.7 8.7 6.6 9.2 16.3
Cumulative effect of
change in accounting
principle.............. 3.6 -- -- -- -- -- --
Income tax provision ... 0.9 0.9 1.5 2.6 5.0 2.6 5.6 6.7
----- ----- ----- ----- ----- ----- ----- -----
Net income ............. 4.6% 1.0% 2.1% 4.1% 3.7% 4.0% 3.6% 9.6%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth, for each component of revenues, the cost of
such revenues as a percentage of such revenues for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR COMBINED (1) PREDECESSOR SUCCESSOR
-------------------------- ------------ ----------- -----------------
THREE NINE THREE
YEAR MONTHS MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED ENDED ENDED
-------------------------- DEC. 31, MAR. 31, DEC. 31, MAR. 31,
1993 1994 1995 1996 1997 1997 1997 1998
----- ----- ----- ----- ------------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Software license........ 27.7% 26.1% 29.3% 27.1% 31.0% 28.6% 31.4% 26.2%
Maintenance............. 52.0 45.3 36.0 37.1 39.6 35.8 40.8 35.6
Professional services... 82.9 89.6 92.6 94.3 84.6 92.6 82.3 79.8
</TABLE>
- --------
(1) Reflects combined data for the three months ended March 31, 1997 (prior to
the Recapitalization) and for the nine months ended December 31, 1997
(subsequent to the Recapitalization).
(2) The write-off of acquired in-process research and development costs for
the year ended December 31, 1997 relates to the Company's acquisition of
R.D. Nickel. Before deducting the nonrecurring write-off for this period,
income from operations as a percentage of total revenues was 10.9% and net
income as a percentage of total revenues was 7.0%.
24
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues
Total Revenues. The Company's revenues are currently derived from fees from
licensing the Company's software products, fees for providing maintenance to
customers which have licensed the Company's software products and fees from
professional services. The Company's total revenues were $55.9 million and
$34.6 million for the three months ended March 31, 1998 and 1997,
respectively, representing an increase of 61%.
Software License Fees. The Company's software license fees are derived
primarily from the licensing of the Company's enterprise development and
enterprise enablement products. Software license fees were $21.6 million and
$7.3 million for the three months ended March 31, 1998 and 1997, respectively,
representing an increase of 195%. This increase was primarily attributable to
the reorganization of the direct sales force at the beginning of 1997. As a
result of this reorganization, the Company has experienced increased
acceptance of ELAs by its customer base. For the three months ended March 31,
1998, the Company entered into 13 ELAs, compared to 4 ELAs for the three
months ended March 31, 1997.
Maintenance Fees. The Company's maintenance fees are derived primarily from
providing technical support to customers which have licensed the Company's
enterprise development and enterprise enablement products. Maintenance is
available in various levels of support and priced as a percentage of the
software license fees. The most commonly contracted level is priced at 18% of
the applicable license fee at the time of renewal. Software customers are not
required to renew their maintenance agreements and renewals can be expected
only if the customer continues to use the licensed product. Maintenance fees
were $19.8 million and $17.4 million for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 14%. This increase was
primarily attributable to the effect of price increases, combined with an
increase in the maintenance base from the sale of new software licenses.
Professional Services Fees. The Company's professional services fees are
derived primarily from work performed by the Company on behalf of customers
who have licensed the Company's software products. Professional services fees
were $14.4 million and $9.9 million for the three months ended March 31, 1998
and 1997, respectively, representing an increase of 45%. This increase was
primarily attributable to the Company's year 2000 program, which began in 1997
and contributed $4.6 million of professional services fees for the three
months ended March 31, 1998 compared to $0.8 million for the three months
ended March 31, 1997.
Cost of Revenues
Software License. Software license costs consist primarily of royalties paid
to third parties. Software license costs were $5.7 million and $2.1 million
for the three months ended March 31, 1998 and 1997, respectively, representing
26% and 29% of software license fees for each respective period. The increase
in dollar amount was primarily due to an increase in sales volume. The
percentage decrease was primarily due to a shift in product mix since royalty
rates on third-party products range from 24% to 40%.
Maintenance. Maintenance costs consist of royalties paid to third parties,
the costs of providing customer support and the distribution costs of new
releases. Maintenance costs were $7.1 million and $6.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 36% of
maintenance fees for each respective period. The increase in dollar amount was
primarily attributable to the increase in sales of software licenses.
Professional Services. Professional services costs consist of labor and
related overhead costs for the people performing the services. Such costs
include costs for project management, quality control and project review.
Professional services costs were $11.5 million and $9.2 million for the three
months ended March 31, 1998 and 1997, respectively, representing 80% and 93%
of professional services fees for each respective period. The improvement in
margin was primarily attributable to improved performance on fixed price
contracts combined with improved utilization of resources.
25
<PAGE>
Operating Expenses
Software Product Development. Software product development expenses include
all labor and overhead costs related to the development of software products
owned by the Company. Software product development costs were $0.8 million for
the three months ended March 31, 1998 representing 3% of software license
fees. There were no software product development expenses for the three months
ended March 31, 1997. Prior to the Recapitalization, the Company's ability to
invest in software product development was constrained. The Company expects
software product development expenses to increase in the future as a
percentage of software license fees.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, benefits, commissions, marketing programs, public
relations, trade shows, seminars, advertising and related communications and
associated overhead costs. Sales and marketing expenses were $11.9 million and
$7.3 million for the three months ended 1998 and 1997, respectively,
representing 21% of total revenues for both respective periods. The increase
in dollar amount was primarily due to several new marketing programs
implemented in 1998.
Administrative and General. Administrative and general expenses include
employee salaries and benefits for administration, executive, finance, legal,
human resources, data center, distribution and internal systems personnel and
associated overhead costs, as well as bad debt, accounting and legal expenses.
Administrative and general expenses were $10.8 million and $8.5 million for
the three months ended March 31, 1998 and 1997, respectively, representing 19%
and 25% of total revenues for each respective period. The increased dollar
amount was primarily attributable to increases in personnel related expenses
and infrastructure required to support an independent company, amortization
expenses relating to the goodwill resulting from the Recapitalization on March
31, 1997 and the R.D. Nickel acquisition on September 1997, as well as the
amortization of the Cooperation Agreement and the write-off of certain
investments.
Other
Other Income and Expense, Net. Other income and expense, net, consists
primarily of interest earned on cash, cash equivalents, short term investments
and long term customer contracts carried by the Company, and miscellaneous
income, offset in part by interest expense associated with equipment
financing. Interest and investment income net of expenses was $0.9 million and
$1.0 million for the three months ended March 31, 1998 and 1997, respectively.
This slight decrease was primarily attributable to the interest income
recorded in 1997 on $30.0 million in loans made to SAG which was offset
against payables due SAG in March 1997 prior to the Recapitalization. This
decrease was offset by the increase in the interest income from investments in
1998 compared to 1997.
Income Tax Provision. The income tax provision was $3.7 million and $0.9
million for the three months ended March 31, 1998 and 1997, respectively,
resulting in effective tax rates of 40.8% and 40.0%, respectively.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues
Total Revenues. The Company's total revenues were $181.2 million and $156.8
million in 1997 and 1996, respectively, representing an increase of 16%.
Software License Fees. Software license fees were $64.1 million and $52.2
million in 1997 and 1996, respectively, representing an increase of 23%. This
increase was primarily attributable to the reorganization of the direct sales
force at the beginning of 1997. As a result of this reorganization, the
Company has experienced increased acceptance of ELAs by its customer base. In
1997, the Company entered into 47 ELAs, compared to 30 ELAs in 1996. The
increase in revenue was also impacted by the acquisition of R.D. Nickel which
added $1.9 million of software license fees since the acquisition in September
1997.
26
<PAGE>
Maintenance Fees. Maintenance fees were $72.7 million and $69.7 million in
1997 and 1996, respectively, representing an increase of 4%. This increase was
primarily attributable to the effect of price increases, combined with an
increase in the maintenance base from the sale of new software licenses and
inclusion of the maintenance fees of $1.7 million attributable to the R.D.
Nickel acquisition in September 1997.
Professional Services Fees. Professional services fees were $44.4 million
and $35.0 million in 1997 and 1996, respectively, representing an increase of
27%. This increase was primarily attributable to the Company's year 2000
program, which began in 1997 and contributed $6.6 million of professional
services fees in 1997.
Cost of Revenues
Software License. Software license costs were $19.9 million and $14.1
million in 1997 and 1996, respectively, representing 31% and 27% of software
license fees for each respective period. The increase in dollar amount was due
primarily to an increase in sales volume. The percentage increase was
primarily due to a shift in product mix since royalty rates on third-party
products vary from 24% to 40%.
Maintenance. Maintenance costs were $28.8 million and $25.9 million in 1997
and 1996, respectively, representing 40% and 37% of maintenance fees for each
respective period. This increase was primarily attributable to the hiring of
additional staff to support new enterprise enablement products.
Professional Services. Professional services costs were $37.6 million and
$33.0 million in 1997 and 1996, respectively, representing 85% and 94% of
professional services fees for each respective period. The improvement in
margin was primarily attributable to improved performance on fixed price
contracts combined with improved utilization of resources. Both of these
improvements were derived from process changes initiated in late 1995 that
included enhanced infrastructure and tools for project management, improved
estimating and bidding processes and expanded quality control procedures.
Operating Expenses
Software Product Development. Software product development costs were $1.1
million and $1.4 million in 1997 and 1996, respectively, representing 2% and
3% of software license fees for each respective period. This decrease was the
result of a sale, with transfer of the applicable software product development
costs, of one of the Company's products in 1996 to a third party. This
decrease was partially offset by the product development costs of $138,000
attributable to the acquisition of R.D. Nickel. Prior to the Recapitalization,
the Company's ability to invest in software product development was
constrained. The Company expects software product development expenses to
increase in the future as a percentage of software license fees.
Sales and Marketing. Sales and marketing expenses were $38.3 million and
$48.7 million in 1997 and 1996, respectively, representing 21% and 31% of
total revenues for each respective period. This decrease was primarily
attributable to reductions in the direct sales force and related support
personnel, combined with reductions in marketing staff and programs. These
reductions, which were undertaken to reduce the Company's cost of sales
relative to software license fees and were part of an overall cost reduction
program, began in 1995 and were substantially implemented by June 1997. The
overall decrease in the sales and marketing expenses was slightly offset by
the sales and marketing expenses of $343,000 attributable the acquisition of
R.D. Nickel.
Administrative and General. Administrative and general expenses were $35.8
million and $28.5 million in 1997 and 1996, respectively, representing 20% and
18% of total revenues for each respective period. The increased dollar amount
was primarily attributable to increases in personnel related expenses and
infrastructure required to support an independent company and the inclusion of
administrative and general expenses of $672,000 since the acquisition of R.D.
Nickel.
Write-off of Acquired In-Process Research and Development Costs. The write-
off of acquired in-process research and development costs was attributable to
certain of the products acquired in the acquisition of R. D. Nickel. See Note
4 of Notes to Consolidated Financial Statements.
27
<PAGE>
Other
Other Income and Expense, Net. Interest and investment income and expense,
net, was $2.0 million and $5.2 million in 1997 and 1996, respectively. This
decrease was primarily attributable to the interest income recorded in 1996 on
$30.0 million in loans made to SAG combined with income received for the sale
of the rights to one of the Company's products in 1996. The loans to SAG were
offset against payables due SAG in March 1997 prior to the Recapitalization.
Income Tax Provision. The income tax provision was $9.0 million and $4.3
million in 1997 and 1996, respectively, resulting in effective tax rates of
41.5% (exclusive of the write-off of acquired in-process research and
development costs), and 40.9%, respectively. This increase in rate was
primarily attributable to the non-deductible expenses incurred as a result of
the Recapitalization.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues
Total Revenues. The Company's total revenues were $156.8 million and $152.6
million in 1996 and 1995, respectively, representing an increase of 3%.
Software License Fees. Software license fees were $52.2 million in 1996 and
$52.1 million in 1995, or 33% and 34% of total revenues for each respective
period.
Maintenance Fees. Maintenance fees were $69.7 million in 1996 and $65.3
million in 1995, representing an increase of 7%. This increase was due
primarily to the effect of price increases combined with an increase in the
maintenance base from the sale of additional software licenses.
Professional Services Fees. Professional services fees were $35.0 million in
1996 and $35.2 million in 1995, or 22% and 23% of total revenues for each
respective period. This minimal decline from 1995 to 1996 was the result of
actions taken in the latter part of 1995 to temporarily curb growth in the
professional services operation so that the Company could build a stronger
infrastructure and control process to support the rapid growth anticipated
from the year 2000 program. These actions were largely accomplished and
accounted for in the first half of 1996.
Cost of Revenues
Software License. Software license costs were $14.1 million in 1996 and
$15.2 million in 1995, representing 27% and 29% of software license fees for
each respective period. This decrease was primarily attributable to lower
third-party royalty rates associated with a slight shift in product mix.
Maintenance. Maintenance costs were $25.9 million in 1996 and $23.5 million
in 1995, representing 37% and 36% of maintenance fees for each respective
period. The increase from 1995 to 1996 was primarily attributable to royalties
related to additional maintenance fees combined with a change in product mix.
Professional Services. Professional services costs were $33.0 million in
1996 and $32.6 million in 1995, representing 94% and 93% of professional
services fees in each respective period. This increase was primarily
attributable to an increase in spending for infrastructure to support the
anticipated growth in the Year 2000 Program, partially offset by improved
margins on new projects.
Operating Expenses
Software Product Development. Software product development expenses were
$1.4 million in 1996 and $0.9 million in 1995, representing 3% and 2% of
software license fees, respectively. This increase was primarily attributable
to the employment of additional staff to develop and enhance the Company's
products.
28
<PAGE>
Sales and Marketing. Sales and marketing expenses were $48.7 million in 1996
and $52.5 million in 1995, representing 31% and 34% of total revenues,
respectively. This decrease in expenses was primarily attributable to
reductions made in 1995 to the direct sales force and to the direct support
personnel. As discussed previously, these reductions commenced in 1995 and
were substantially implemented by June 1997. The net effect of this reduction
during 1996 was to reduce the direct selling and support personnel from 131 at
December 31, 1995, to 98 at December 31, 1996, a net reduction of 25%.
Administrative and General. Administrative and general expenses were $28.5
million in 1996 and $24.6 million in 1995, representing 18% and 16% of total
revenues, respectively. This increase was primarily attributable to
investments in computer equipment necessary to support anticipated growth of
the year 2000 program and severance payments made to the Company's former
chief executive officer.
Other
Other Income and Expense, Net. Other income and expense, net, was $5.2
million in 1996 and $2.4 million in 1995. The increase was attributable to
interest received on $30.0 million in loans made to SAG in three stages over
1995 and 1996, combined with income received for the sale of the rights to one
of the Company's products.
Income Tax Provision. The income tax provision was $4.3 million and $2.3
million in 1996 and 1995, respectively, resulting in effective tax rates of
40.9% and 41.0%, respectively.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for each of the nine most recent quarters. In the opinion of
management, this information has been prepared on the same basis as the
audited financial statements, and all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in
conjunction with the audited Consolidated Financial Statements and Notes
thereto. The operating results for any quarters are not necessarily indicative
of results for any future periods.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------------- -------------------------------------
QUARTER ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.. $ 6,609 $12,369 $12,785 $20,400 $ 7,341 $14,254 $18,458 $24,084 $21,649
Maintenance fees....... 17,171 17,225 17,382 17,924 17,352 18,394 17,542 19,401 19,800
Professional service
fees.................. 8,506 7,515 10,959 7,995 9,948 10,299 10,729 13,422 14,414
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 32,286 37,109 41,126 46,319 34,641 42,947 46,729 56,907 55,863
------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Software license....... 1,758 3,291 3,494 5,577 2,098 4,074 6,428 7,309 5,670
Maintenance............ 6,614 6,376 6,273 6,622 6,205 6,577 8,062 7,920 7,057
Professional services.. 8,480 7,291 10,083 7,112 9,211 9,451 8,491 10,414 11,501
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 16,852 16,958 19,850 19,311 17,514 20,102 22,981 25,643 24,228
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 15,434 20,151 21,276 27,008 17,127 22,845 23,748 31,264 31,635
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Software product
development........... 410 591 371 -- -- 283 312 498 755
Sales and marketing.... 8,576 12,851 9,712 17,538 7,317 11,477 9,060 10,466 11,873
Administrative and
general............... 7,349 8,784 7,339 5,067 8,500 8,932 9,317 9,009 10,805
Write-off of acquired
in-process research
and development
costs (1)............. -- -- -- -- -- -- 6,051 -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 16,335 22,226 17,422 22,605 15,817 20,692 24,740 19,973 23,433
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (901) (2,075) 3,854 4,403 1,310 2,153 (992) 11,291 8,202
Other income and
expense, net........... 592 1,048 533 3,057 978 1,597 (221) (359) 906
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (309) (1,027) 4,387 7,460 2,288 3,750 (1,213) 10,932 9,108
Income tax provision
(benefit).............. (97) (404) 1,642 3,161 915 1,599 2,014 4,518 3,718
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (212) $ (623) $ 2,745 $ 4,299 $ 1,373 $ 2,151 $(3,227) $ 6,414 $ 5,390
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) The write-off of acquired in-process research and development costs for
the quarter ended September 30, 1997 relates to the Company's acquisition
of R.D. Nickel. Before deducting the nonrecurring write-off for this
period, income from operations was approximately $5.1 million and net
income was approximately $2.8 million.
30
<PAGE>
The following table sets forth certain unaudited consolidated quarterly
statement of operations data expressed as a percentage of total revenues for
each of the nine most recent quarters.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------------- ------------------------------------
QUARTER ENDED
------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees.. 20.5% 33.3% 31.1% 44.0% 21.2% 33.2% 39.5% 42.3% 38.8%
Maintenance fees....... 53.2 46.4 42.3 38.7 50.1 42.8 37.5 34.1 35.4
Professional service
fees.................. 26.3 20.3 26.6 17.3 28.7 24.0 23.0 23.6 25.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Cost of revenue:
Software license....... 5.4 8.9 8.5 12.0 6.1 9.5 13.8 12.8 10.2
Maintenance............ 20.5 17.2 15.3 14.3 17.9 15.3 17.3 13.9 12.6
Professional service... 26.3 19.6 24.5 15.4 26.6 22.0 18.2 18.3 20.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Total cost of reve-
nues.................. 52.2 45.7 48.3 41.7 50.6 46.8 49.3 45.0 43.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 47.8 54.3 51.7 58.3 49.4 53.2 50.7 55.0 56.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Software product devel-
opment................ 1.3 1.6 0.9 -- -- 0.7 0.7 0.9 1.3
Sales and marketing.... 26.6 34.6 23.6 37.9 21.1 26.7 19.4 18.4 21.3
Administrative and gen-
eral.................. 22.8 23.7 17.8 10.9 24.5 20.8 19.9 15.8 19.3
Write-off of acquired
in-process research
and development
costs (1)............. -- -- -- -- -- -- 12.9 -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses................ 50.7 59.9 42.3 48.8 45.6 48.2 52.9 35.1 41.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from oper-
ations................. (2.9) (5.6) 9.4 9.5 3.8 5.0 (2.2) 19.8 14.7
Other income and ex-
pense, net............. 1.8 2.8 1.3 6.6 2.8 3.7 (0.5) (0.6) 1.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before in-
come taxes............. (1.1) (2.8) 10.7 16.1 6.6 8.7 (2.7) 19.2 16.3
Income tax provision
(benefit).............. (0.3) (1.1) 4.0 6.8 2.6 3.7 4.3 7.9 6.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (0.8)% (1.7)% 6.7% 9.3% 4.0% 5.0% (7.0)% 11.3% 9.6%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------
(1) The write-off of acquired in-process research and development costs for
the quarter ended September 30, 1997 relates to the Company's acquisition
of R.D. Nickel. Before deducting the nonrecurring write-off for this
period, income from operations as a percentage of total revenues was 10.8%
and net income as a percentage of total revenues was 6.0%.
As a result of the Recapitalization on March 31, 1997, the Company is no
longer a wholly owned subsidiary of SAG. Management has undertaken several
strategic initiatives since the Recapitalization to increase revenue growth
and profitability including building a product development organization,
developing product and professional services offerings that address the year
2000 problem and acquiring R.D. Nickel. The revenue and profit improvements in
1997 from the first quarter to the second, third and fourth quarters may be
partially attributable to these changes, but there can be no assurance that
this trend will continue in future quarters. Due in part to these initiatives,
the Company expects that product development costs as a percentage of software
license fees will increase and that administrative and general expenses as a
percentage of total revenues will decrease.
The Company's results of operations have historically fluctuated on a
quarterly basis and are expected to be subject to quarterly fluctuations in
the future. The Company's software license fees have tended to increase
through each successive quarter of the year, with software license fees in the
first quarter of a year being lower than those in the immediately preceding
fourth quarter. Third quarter results have been favorably affected by
increased end of the year spending by the Company's government customers.
Fourth quarter results benefit from those customers who operate on a calendar
year basis, combined with the Company's sales compensation plans which include
incentives for achieving annual targets. In addition, due to the
reorganization of the sales force
31
<PAGE>
and the increase in the number of ELAs, the Company's historic trend of third
and fourth quarter revenues that are significantly larger than previous first
and second quarter revenues may not continue.
Although past results may not be indicative of future results, maintenance
fees generally have not fluctuated on a quarterly basis to the same degree as
software license fees due to the large percentage of maintenance fees
generated from renewals of annual maintenance contracts which are recognized
ratably over the contract period.
Revenues from professional services are influenced by the number of
personnel providing such services, the utilization rates of such personnel and
the number of billable days in a quarter. Other factors being equal, a quarter
ending December 31 will generally reflect lower professional services fees
than other quarters due to the relatively large number of holidays falling in
that quarter. In addition, the completion or commencement of significant
professional services projects may affect the revenues from professional
services in a particular quarter.
Software license costs have varied from period to period and can be expected
to fluctuate in the future primarily due to shifts in product mix since
royalty rates on third party products vary from 24% to 40%.
Historically, sales and marketing expenses have varied from quarter to
quarter in absolute dollar terms and as a percentage of revenues, as a result
of the size and timing of marketing programs. A significant portion of
marketing program costs are variable in nature and subject to management
discretion as to their timing and amount.
The Company's quarterly operating results may continue to fluctuate due to
numerous factors, including the demand for the Company's products and
services, the timing and cost of new product and service introductions and
product enhancements by the Company or its competitors, changes in the mix of
products and services sold by the Company and in the mix of sales by
distribution channels, commencement or conclusion of significant service
contracts, timing of any acquisitions and associated costs, the size, timing
and terms of customer orders, including delays in significant orders, changes
in pricing policies by the Company or its competitors, the timing of
collection of accounts receivable, changes in foreign currency exchange rates,
competitive conditions in the industry and general economic conditions. The
Company's expenses are generally fixed and do not vary significantly in the
short term with revenues. As a result, operating and net income in a given
quarter may be disproportionately affected by a reduction in revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since 1988, when the Company became a wholly owned subsidiary of SAG, the
Company has financed its operations principally through cash flow from
operating activities. In order to meet its short term cash needs and to pay
dividends to SAG, the Company began to periodically sell long term customer
receivable contracts. Sales of long term customer receivable contracts
increased in subsequent years in order to meet SAG's directives and in
connection with the Recapitalization. Since the Recapitalization, the Company
has sold $27.9 million of long term customer receivable contracts. Net cash
provided by operating activities was $1.4 million and $1.5 million (excluding
$8.9 million of proceeds from the sales of accounts receivable) for the three
months ended March 31, 1998 and 1997, respectively, and $13.3 million, $37.5
million and $29.6 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Investing activities used net cash of $1.5 million and $0.2 million for the
three months ended March 31, 1998 and 1997, respectively, primarily to fund
capital expenditures needed to support expansion of the Company's business.
Investing activities used net cash of $33.2 million, $4.3 million and $23.8
million for the years ended December 31, 1997, 1996 and 1995, respectively,
primarily to fund capital expenditures needed to support expansion of the
Company's business, to provide loans to SAG, as consideration for the
Cooperation Agreement from SAG and to fund the acquisition of R.D. Nickel.
Financing activities used net cash of $0.1 million for the three months
ended March 31, 1998, primarily due to additional payments made for costs
incurred in connection with the IPO. There were no financing activities for
the three months ended March 31, 1997.
32
<PAGE>
Financing activities provided net cash of $44.6 million for the year ended
December 31, 1997, primarily from the proceeds from the sale of Common Stock
from the IPO. During 1996 and 1995, financing activities used net cash of $9.0
million and $4.8 million, respectively, primarily for the repayment of long
term obligations and the payment of dividends.
The Company has no long term debt, and as of March 31, 1998 and December 31,
1997, had $50.3 million and $50.4 million in cash and cash equivalents,
respectively. The Company currently has relationships with two third parties
whereby the Company may sell long term receivable contracts. These
transactions are treated as sales by the Company as the economic interest in
the contract is transferred to the buyer. As of March 31, 1998 and December
31, 1997, the Company remained contingently liable under the recourse
provisions associated with these sales in the amount of $42.8 million and
$47.9 million, respectively. The Company's accounts receivable days sales
outstanding at December 31, 1997 was 62.
The Company's international distributors report to and pay the Company in
U.S. dollars. In addition, royalties reported and paid by the Company to SAG
under the Cooperation Agreement are in U.S. dollars. The Company's Mexican
operations commenced in 1996 and represented less than 3% of total revenues
since that time. With the acquisition of R.D. Nickel, the Company began direct
sales in Canada effective October 1, 1997. Revenues from this source were
approximately 7% of total revenues since the acquisition. The Company,
therefore, has not to date engaged in foreign currency hedging transactions.
The Company may enter into hedging transactions in the future.
The Company traditionally leases all major equipment, and has no investment
in inventory or facilities other than leasehold improvements.
The Company believes that its existing cash balances, funds generated from
operations and funds received from the sale of receivables, if any, will be
sufficient to finance the Company's operations for at least the next twelve
months. Although operating activities may provide cash in certain periods, to
the extent the Company grows in the future, its operating and investing
activities may use such cash. There can be no assurances that any necessary
additional financing will be available to the Company on commercially
reasonable terms. The Company had no material capital commitments or planned
expenditures as of March 31, 1998.
33
<PAGE>
BUSINESS
The Company is an enterprise solutions company that provides robust software
products and related professional services to large organizations with complex
computing requirements. The Company's products are used to build and enhance
mission-critical applications that require reliability, scalability and
security, such as customer billing systems, financial accounting systems and
inventory management systems. To complement its products, the Company has a
comprehensive professional services offering, including consulting, software
integration, systems implementation and large project management services. The
Company has over 24 years of experience in addressing the needs of
organizations with complex enterprise level computing environments.
The Company provides enterprise development software products and related
professional services used by organizations to develop new mission-critical
applications and enterprise enablement software products and related
professional services used to extend and integrate business applications. The
Company's enterprise development products include ADABAS, a high-performance
database management system designed to operate with a variety of data types
and computer platforms, and NATURAL, a 4GL programming language that enables
the development of applications that are portable, scaleable and interoperable
across multiple computing platforms. The Company also provides enterprise
enablement software products and professional services that allow
organizations to integrate their mission-critical applications with other
applications and extend them to the Internet and intranets. Products in this
area include ENTIRE, a family of enterprise application integration products
that facilitates the communication between application components across
heterogeneous computing environments; iXpress, a web application assembly and
deployment platform; and EntireX DCOM, a product that uses Microsoft's ActiveX
technology to integrate applications written in a variety of programming
languages. The Company also has a year 2000 program which offers an internally
developed software product, INSIGHT 2000 Tool Kit, as well as project
management and consulting services to assist customers in the resolution of
their year 2000 problem. The Company's professional services that complement
its products include application development and enhancement, application
reengineering, application porting, rightsizing and application integration.
The Company markets and sells its software products and services through
direct and indirect channels in North America, South America, Japan and
Israel. Over 1,500 customers in North America, South America, Japan and Israel
have licensed the Company's products or purchased the Company's professional
services since January 1996. These customers include large corporations,
government agencies and educational institutions, such as Nabisco, Inc.,
Sprint Corporation, the National Aeronautics and Space Administration, the
Federal Aviation Administration, Brown University, USX Corporation, the
University of Texas and the State of California.
INDUSTRY BACKGROUND
Worldwide, large business and governmental organizations rely on large-scale
computer applications to help manage their businesses. These applications,
many of which are mission-critical, contain the core knowledge and processes
that support the major operations of these organizations. Examples of such
applications include customer billing systems, financial accounting systems
and inventory management systems.
Mainframes are the predominant computing platform for running mission-
critical applications because they provide the high levels of reliability,
scalability, security, manageability and control required by such
applications. Recently, with the proliferation of intranets, the growth of the
Internet and the decreasing cost of operating mainframe systems, mainframes
have gained increased importance as servers capable of managing and providing
widespread access to corporate data. Large organizations are also seeking to
leverage investments in existing systems by integrating their mainframe
systems with distributed computing environments. International Data
Corporation estimated that worldwide software revenue for the mainframe
segment exceeded $26 billion in 1996.
34
<PAGE>
Organizations must continually build, modify and maintain their information
systems in order to respond to competitive pressures, regulatory changes and
technological advances. For example, many organizations have initiated
significant modifications of their information systems to address the
increasing demands of management for more information for decision making and
the needs of customers and suppliers for greater access to information.
Organizations are constantly updating their information systems to exploit
advances in database management, communication and software technologies and
to maximize the return on their investments in existing systems. In addition,
the size and complexity of the year 2000 problem, a problem expected in the
year 2000 when applications with two-digit entries in the date code field will
need to accept four-digit entries to distinguish twenty-first century dates
from twentieth century dates, has created significant demand for technology
and professional services that address that problem.
The need to continually adapt and integrate information systems is placing
increased demands on organizations. Already suffering from a shortage of
qualified technical professionals, information technology ("IT") organizations
are required to work more productively, to distribute information to users
more quickly and to preserve the investments that have already been made in
computing assets. The Company estimates that there are over one billion lines
of NATURAL code in the United States alone. IT organizations are seeking to
integrate new technologies into their mainframe systems to avoid the downtime,
expense and risks involved in replacing these systems and the applications
running on these systems. In addition, IT organizations are increasingly
seeking to eliminate "islands of automation" by integrating business
applications across the enterprise and with external business partners. In
many cases, IT organizations lack the resources and expertise required to
cost-effectively implement, integrate and maintain distributed computing
systems. The inability of these organizations to fully utilize available
technology, together with the limited functionality of many existing processes
and tools, has increased demand for integrated software development products
and professional services.
As a result, organizations are increasingly seeking to achieve the
reliability, scalability and interoperability of legacy systems while
leveraging the speed, cost effectiveness and flexibility of new technologies
in an integrated manner. The Company believes that organizations are meeting
this challenge by working with vendors that: (i) provide enterprise level
performance; (ii) enhance and extend existing computing investments; and (iii)
provide a comprehensive solution of products, professional services and
support.
THE COMPANY'S SOLUTIONS
Over its 24 year history, the Company has developed significant expertise in
addressing the needs of large, complex computing environments at the
enterprise level. The Company's solutions enable its customers to leverage
their investments in existing information systems and personnel, and to
enhance, expand and integrate these systems to meet the changing needs of the
enterprise. The Company believes its solutions provide the following benefits:
Provide Enterprise Level Performance. The Company's solutions consist of
software products and related professional services that are used for the
development, integration and enhancement of mission-critical enterprise
applications. The Company's products are used to build, maintain and integrate
business applications that require reliability, scalability and security, and
constitute the core technology behind mission-critical systems, such as those
used for customer billing, financial accounting and inventory management.
Enhance and Extend Existing Computing Investments. The Company's application
development and enablement products and related professional services allow
its customers to preserve their investments in mainframe systems by updating
and evolving their systems to meet changing business processes and needs. The
Company's enterprise enablement products allow customers to integrate their
legacy systems, providing application-to-application interoperability and the
means to share information within and beyond the enterprise.
Enable New Enterprise Applications. The Company's products and professional
services enable its customers to implement new enterprise applications that
require access to existing corporate data wherever it
35
<PAGE>
resides. For example, the Company's software products and professional
services expertise in building mission-critical applications enable its
customers to realize the benefits of enterprise class applications such as
customer billing systems, financial accounting systems and inventory
management systems. Moreover, the Company's enterprise enablement products
allow its customers to integrate new applications with existing applications
across the enterprise.
Extend Mission-Critical Applications to Distributed Computing
Environments. The Company's solutions allow its customers to extend their
mission-critical applications to distributed computing environments.
Organizations can use the Company's products and professional services to
connect their network-based architectures, including Internet and intranet-
based systems, to their mainframe applications, providing improved access to
corporate data and improved business process coordination. In this manner,
existing applications need not be rewritten in order to extend them to the
network or the Web, and the security, extensibility and scalability of
mainframe environments can be extended.
Provide Solutions to the Year 2000 Problem. The Company's year 2000 product,
INSIGHT 2000 Tool Kit, and professional services assist its customers in
resolving their year 2000 problem. Organizations can use the Company's year
2000 product and professional services to analyze the amount of remediation
needed and to develop and implement a remediation and testing plan. In this
manner, existing applications need not be abandoned or replaced upon the
arrival of the year 2000.
Provide a Comprehensive Solution of Products, Professional Services and
Support. The Company's solutions represent a comprehensive offering of
products, professional services and support from a single vendor. While many
"point" products exist in the form of connectivity tools, programming
languages and data management products, most are limited in their ability to
support the enterprise computing environment and to provide enterprise level
application integration. The Company's extensive experience in enterprise
software and related professional services enables it to address customers'
mission-critical computing needs.
COMPANY STRATEGY
The Company's strategy is to further leverage its current leadership
position in software solutions for the development and integration of
enterprise applications for large organizations by extending its product and
professional services offerings with a particular focus on the enterprise
application integration market. Key elements of the Company's strategy include
enhancing and extending product offerings with added features and
functionality, broadening its product offerings for the enterprise application
integration market, leveraging its customer base, expanding professional
service offerings and leveraging distribution channels.
Enhance and Extend Product Offerings. The Company intends to enhance and
extend its product offerings with a primary focus on enterprise application
integration products. The Company believes that significant opportunity exists
for software solutions which enable the integration of mainframe legacy
applications with commercial Enterprise Resource Planning ("ERP") systems,
internally developed applications and other client/server and
Internet/intranet based applications. The Company will continue to extend
Microsoft's ActiveX and DCOM technologies into large enterprise computing
environments enabling its customers to achieve enterprise-wide application
integration. The Company intends to broaden its product offerings through
internal product development, additional licensed products from third parties
and through acquisitions.
Leverage Customer Base. Most of the Company's customers are large,
sophisticated organizations with complex information systems in dispersed,
heterogeneous computing environments. Over 1,500 customers in North America,
South America, Japan and Israel have licensed the Company's products or
purchased the Company's professional services since January 1996. Typically,
the customer's IT budget substantially exceeds the annual amount that the
customer spends with the Company. The Company believes it can expand its share
of its customers' IT budgets through increased and improved product and
professional services offerings.
Expand Professional Services Offerings. The Company believes that, due to
the strategic nature of its products, customers require the Company to provide
comprehensive professional services and support. The
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<PAGE>
Company's strategy is to expand its key professional services offerings, which
are centered around application development and integration, Web integration
and the year 2000 problem. The Company expects to hire additional consultants
and to develop new professional services offerings to meet its customers'
evolving service needs. The Company intends to expand its efforts to cross
sell its professional services to its product customers.
Leverage Distribution Channels. The Company directly and indirectly sells
its products in over 20 countries throughout the Territory through exclusive
distributors. Under its Cooperation Agreement with SAG, the Company has access
to SAG's distribution channels for the Company's products (other than those
licensed from SAG) in over 50 additional countries outside the Territory. The
Company intends to leverage this distribution channel by developing and
acquiring additional products for distribution by SAG.
PRODUCTS AND SERVICES
The following diagram depicts how the Company provides enterprise solutions
for its customers. The Company works at the highest level of IT organizations
to evaluate the overall needs of the enterprise and develop solutions that use
its products and professional services to effectively build, extend and enable
complex computing environments and integrate business applications. Typically,
the Company's solutions focus either on building and deploying new mission-
critical applications or enhancing and extending existing business-critical
systems through enterprise application integration. The Company's products and
professional services allow its customers to leverage their investments in
existing information systems and personnel and to enhance and expand these
systems to meet the changing needs of their organizations.
[ENTERPRISE MARKET CHART APPEARS HERE]
37
<PAGE>
The following table summarizes the Company's product offerings by category,
indicating the year the product was introduced, the shipment date of the
product's current version, and the platforms supported by the product.
<TABLE>
<CAPTION>
YEAR OF CURRENT PLATFORMS
PRODUCTS (1) INTRODUCTION VERSION SUPPORTED
<S> <C> <C> <C>
ENTERPRISE DEVELOPMENT
- --------------------------------------------------------------
NATURAL Product Line
NATURAL 1979 12/95 MVS/VSE
NATURAL 1993 7/96 UNIX
NATURAL 1996 11/96 WIN NT
NATURAL Lightstorm 1995 2/97 WIN
CONSTRUCT 1988 9/97 MVS/VSE
CONSTRUCT 1993 10/96 UNIX
CONSTRUCT Spectrum 1997 8/97 MVS/VSE
CONSTRUCT Spectrum 1997 8/97 WIN NT
CONSTRUCT Spectrum SDK 1997 8/97 MVS/VSE
CONSTRUCT Spectrum SDK 1997 8/97 WIN NT
PREDICT 1983 2/97 MVS/VSE
PREDICT 1993 2/97 UNIX
- --------------------------------------------------------------
ADABAS Product Line
ADABAS 1972 1/97 MVS/VSE
ADABAS 1993 7/97 UNIX
ADABAS 1997 3/98 WIN/NT
ADABAS Delta Save Facility 1996 2/96 MVS/VSE
ADABAS FASTPATH 1991 12/96 MVS/VSE
ADABAS SQL Server 1992 10/95 MVS/VSE
ADABAS Vista 1997 9/97 MVS/VSE
ADABAS ADAPLEX + 1996 2/97 MVS/VSE
- --------------------------------------------------------------
ENTERPRISE ENABLEMENT
- --------------------------------------------------------------
ENTIRE Product Line
iXpress 1996 8/97 WIN NT
ENTIRE ACCESS 1994 12/96 UNIX
ENTIRE ACCESS 1995 12/96 WIN NT
ENTIRE BROKER 1994 4/97 MVS/VSE
ENTIRE BROKER 1996 8/97 UNIX
ENTIRE BROKER 1996 7/97 WIN NT
ENTIRE BROKER SDK 1997 2/98 UNIX
ENTIRE BROKER SDK 1997 1/98 WIN NT
ENTIRE BROKER APPC 1991 2/95 MVS/VSE
ENTIRE NET-WORK 1987 8/97 MVS/VSE
ENTIRE NET-WORK 1993 9/97 UNIX
ENTIRE NET-WORK 1995 3/97 WIN NT
ENTIRE SAF Gateway 1997 4/97 MVS/VSE
EntireX DCOM 1997 9/97 UNIX
- --------------------------------------------------------------
Year 2000 Product
INSIGHT 2000 Tool Kit 1997 2/98 WIN
- --------------------------------------------------------------
</TABLE>
- --------
(1) CONSTRUCT, CONSTRUCT Spectrum, CONSTRUCT Spectrum SDK and INSIGHT 2000
Tool Kit are products owned by the Company. iXpress is a product which the
Company has the right to license pursuant to an agreement with a third
party other than SAG. The Company has the exclusive right to license and
service all other products listed in this table in North America, South
America, Japan and Israel pursuant to the Cooperation Agreement with SAG.
38
<PAGE>
Enterprise Development Products and Professional Services
The Company provides a family of enterprise development software products
and related professional services that allow its customers to develop and
deploy enterprise solutions that are integrated with existing data and
applications.
. NATURAL, the Company's 4GL programming language for the enterprise
environment, is designed to increase productivity in application software
design, development and deployment. NATURAL supports Rapid Application
Development to RDBMS environments with applications that are portable,
scaleable and interoperable across multiple computing platforms.
. Add-on products for the NATURAL environment include: NATURAL LightStorm,
for repository-based development environments; CONSTRUCT, for model-based
Rapid Application Development; and CONSTRUCT Spectrum, for automated
development of distributed components.
The Company's family of data management solutions delivers access to data
and are designed to ensure the reliability, integrity, and security of such
data throughout an organization's computing environment.
. ADABAS, the Company's flagship high-performance database management
product, is designed to handle large volumes of changing data requiring
high levels of availability. It provides multi-data model support, multi-
platform support, comprehensive SQL support, and a variety of extended
capabilities that take advantage of technological advances in both
hardware and software.
. Add-on products for the ADABAS environment include: ADABAS SQL Server, an
SQL interface to ADABAS data; ADABAS ADAPLEX+, a technology that
distributes and presents a single view of multiple databases; ADABAS
FASTPATH, which optimizes database and application performance; and
ADABAS Delta Save Facility, a product for reducing backup time and
database recovery processing.
. Core Product Services. These professional services focus on the
deployment and use of the Company's database management and application
development products, including application development and enhancement,
application reengineering, application porting and rightsizing.
Enterprise Enablement Products and Professional Services
The Company's ENTIRE application integration products and professional
services minimize the complexity of integrating a distributed computing
environment that encompasses a variety of platforms, protocols, programming
languages and databases.
. The ENTIRE product family includes: ENTIRE BROKER, a cross-platform
messaging product that links mainframe applications and components to
ActiveX- and Java-enabled desktops; and ENTIRE SAF Gateway, a central
security administration environment. The Company also offers ENTIRE
BROKER APPC, a product that links Advanced Program-to-Program
Communication and IBM's MQSeries-enabled mainframe applications to
ActiveX- and Java-enabled desktops; ENTIRE BROKER SDK, a set of software
products for building and deploying distributed applications; and EntireX
DCOM, a product that allows applications or pieces of applications to
work together transparently on Windows, UNIX and MVS/VSE mainframe
platforms.
. iXpress is an Internet-enablement technology that combines component
technology, such as Java and ActiveX, with enterprise systems, allowing
organizations to deliver and manage business-critical information
solutions via the Web.
. Integration Services. The Company offers its customers a variety of
application integration professional services, such as integrating an
organization's Internet site with an order entry system; integrating
multiple sources of data, applications and services from multiple
platforms; enabling secure access for suppliers to specific data and
applications; and distributing application components across the network.
. INSIGHT 2000 Tool Kit is a product that allows developers to analyze and
remediate NATURAL code by providing a picture of how much code needs to
be fixed and helping project managers break year 2000 projects into
segments and develop a comprehensive work plan for executing remediation.
. Year 2000 Services. The Company's year 2000 professional services
offerings include analysis, remediation, testing and reimplementation to
assist customers in resolving their year 2000 problem. These
39
<PAGE>
services are provided through a professional staff with expertise in
managing large projects and in the methodologies and products that
underlie software integration and systems management. The Company also
recently established Millennium Centers in Colorado, New Jersey and Texas
to provide remediation and testing for its year 2000 program and plans to
establish additional centers in the future. Year 2000 remediation can be
done at one of the Company's Millennium Centers or at the customer's site.
OTHER SERVICES
Education Services. The Company provides customers with in-depth training in
the Company's products, with courses available through scheduled and
customized classes. In addition, the Company offers programs to accelerate the
implementation of application development, application integration and year
2000 projects.
Technology Services. The Company also provides system engineering services,
supplementary database administration services and database application and
network performance and tuning services.
RESEARCH AND DEVELOPMENT
Prior to the Recapitalization, the Company was a wholly owned subsidiary of
SAG and the Company's research and development efforts were directed by SAG.
The Company's research and development expenses were $900,000 and $1.4 million
in 1995 and 1996, respectively.
Since the Recapitalization, the Company has begun building its internal
product development group. The first product resulting from the Company's
recent internal product development efforts is the INSIGHT 2000 Tool Kit,
which was released in September 1997. The Company intends to continue
expanding its product development group through additional acquisitions and
internal hiring. The Company's research and development expenses were $1.1
million in 1997.
Since the Cooperation Agreement provides the Company with an exclusive and
perpetual right to license in the Territory products developed by SAG, the
Company also expects to continue to benefit from SAG's product development
efforts. SAG's product development costs were approximately $56.0 million for
both 1996 and 1997. In September 1997, SAG released EntireX DCOM, the first
product resulting from SAG's strategic relationship with Microsoft.
PRODUCT MAINTENANCE AND CUSTOMER SUPPORT
The Company offers a wide range of product maintenance and customer support
services. The Company believes that its future success is dependent in part on
its ability to provide high levels of customer service in order to cultivate
advocacy by the Company's installed customer base. For the year ended December
31, 1997, approximately 95% of the Company's customers who were eligible
renewed at least one of their maintenance agreements.
Customers may choose from three levels of service and support offerings:
basic, extended and custom, which are differentiated by service deliverables
and access to support persons. Some of these customer support services include
support during product proof-of-concept/trial, technical support 24 hours a
day, seven days a week, customized support offerings, onsite installation and
implementation, remote analysis automated customer assistance and web-based
electronic services.
CUSTOMERS AND MARKETS
Over 1,500 customers in the Territory have licensed the Company's products
or purchased the Company's professional services since January 1996. These
customers consist primarily of major corporations, government agencies and
educational institutions.
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<PAGE>
The following examples are representative of how customers use the Company's
products and professional services to build and enable enterprise level,
mission-critical applications for large organizations.
Utility Business Services, Incorporated ("UBS"). An information service
bureau for water and wastewater companies, UBS needed to develop a new
customer information system to handle approximately 600,000 customer accounts
for 15 clients in New Jersey and New York. UBS decided to use the Company's
ADABAS, NATURAL and CONSTRUCT products and related services to develop a
system of enhanced services and applications that could be sold as an
independent software package to UBS's water utility clients handling their own
billing and information tracking. According to UBS, six of its programmers
developed the entire system in less than two years at a cost of approximately
$420,000 and the system resulted in savings of approximately $1.7 million
compared to projected COBOL development costs.
Federal Aviation Administration ("FAA"). In 1994, the FAA decided to migrate
its 400 mainframe COBOL financial and accounting modules to a client/server
windows architecture. To facilitate conversion of the online portion of the
system, the FAA used the Company's NATURAL Lightstorm product to create new
client/server components and the ADABAS product to manage data running in
Microsoft's Windows and Windows NT environments. According to the FAA, the new
system supports 1.7 million financial transactions each month, is utilized to
pay vendors an average of $27 million a day and is used daily by approximately
2,000 employees worldwide to process departmental accounting information.
City of New York. The City of New York was using an integrated, COBOL-based
system to process various business and commercial compliance activities, such
as license processing, inspections, cash management and consumer services. In
order to keep up with the changing operational requirements of a diverse user
community, the City of New York decided to switch to a new system using the
Company's ADABAS and NATURAL products. According to the City of New York, the
new system produced a 60% decrease in license processing time and resulted in
a 40% increase in revenue collections.
Pepsi-Cola General Bottlers Inc. ("PCGB"). In 1990, PCGB, then one of the
largest of Pepsi-Cola's bottlers, found that its systems were unable to handle
the company's volume of transactions. PCGB decided to replace its existing
systems with a system designed to centralize and support business processes in
a single set of programs and files. PCGB chose the Company's ADABAS product
and, in the process, developed its own enterprise methodology called Open
Batch Architecture which uses the Company's NATURAL, CONSTRUCT and ADABAS
products to streamline code development. According to PCGB, its new system for
domestic operations processes approximately 40 million commands daily.
Vincent Metal Goods ("Vincent"). As a result of a merger in 1995, Vincent, a
large stainless steel and aluminum distributor, needed to consolidate and
convert its two existing computing systems into a single system for use by
Vincent's sales, warehouse and clerical employees located in 49 sites
throughout the United States. Vincent used the Company's professional services
offerings to develop, program and test new applications and selected a
mainframe system running on the Company's ADABAS and NATURAL products.
According to Vincent, its consolidated computer system is year 2000-ready and
was successfully completed three months ahead of schedule, within budget and
with minimal disruption to business functions and end-users.
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<PAGE>
The following is a representative list of some of the Company's customers
that produced revenues of at least $500,000 for the Company since January 1,
1996.
American Community Mutual Insurance Co. National Aeronautics and Space
American Electric Power Company, Inc. Administration
Banorte Bank Nissan Motor Co., LTD.
Brown University Nomura Research Institute, Ltd.
Burlington Northern Santa Fe Corporation Norfolk Southern Corporation
Cable and Wireless, PLC Ryerson Tull Rykoff-Sexton, Inc.
Centers for Disease Control S.C. Johnson & Son Inc.
Central Hudson Gas & Electric Corporation Sabre Group
City of New York Sprint Corporation
City of Philadelphia State of California
Commonwealth of Virginia State of Hawaii
Credit Suisse First Boston State of Nevada
Cutler-Hammer, Inc. State of New Jersey
Delta Air Lines, Inc. State of Texas
Duke Power Company State of Washington
Federal Aviation Administration Union Electric Company
Federal Bureau of Investigation University of Arkansas
Federal Express Corp. University of Hawaii
KN Energy, Inc. University of Texas
Lehman Brothers, Inc. University of Toronto
US Airways Group, Inc.
Morgan Stanley, Dean Witter, Discover & Co.
Nabisco Inc. US Patent & Trademark Office
USX Corporation
In 1995, 1996 and 1997, no single customer accounted for more than 10% of
the Company's total revenues.
SALES AND MARKETING
The Company sells and markets its products through both direct and indirect
channels in North America, South America, Japan and Israel. In North America,
the Company sells and markets its products and services through a direct
channel, consisting of 19 offices as of December 31, 1997. The Company sells
its products in over 20 additional countries through six exclusive
distributorships in South America, Japan and Israel. In addition, the Company
has access to SAG's distribution channels for the Company's products (other
than those licensed from SAG) in over 50 countries outside North America,
South America, Japan and Israel.
The Company's corporate marketing organization supports the Company's sales
and professional services channels through the efforts of professionals with
expertise in product marketing and marketing communications. The Company also
has strategic marketing relationships with certain vendors of computing
products and services, including IBM, Microsoft and BDM International, Inc., a
subsidiary of TRW, Inc.
COMPETITION
The markets for the Company's software products and professional services
are highly competitive and characterized by continual change and improvement
in technology. The Company provides products and professional services to
several markets within the computer industry and encounters a variety of
competitors within each market. Many of the Company's competitors have
significantly greater financial, marketing and other competitive resources
than the Company. In addition, in certain markets in which the Company
competes there are no significant barriers to entry.
In the enterprise development markets, the Company's competitors with
respect to enterprise and departmental database management products include
IBM, Oracle, Informix, Sybase and Microsoft. In addition,
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<PAGE>
the Company's 4GL applications programming language, NATURAL, competes with
offerings from both large and small companies, including Oracle, Microsoft,
IBM and Sterling Software, Inc. In the enterprise enablement market, the
Company's products compete in both the component/object and the message-
oriented segments of the middleware market, where its competitors include IBM
and Microsoft. In the market for year 2000 products and professional services,
the Company's competitors include Formal Systems, Inc., Viasoft, Inc. and
Electronic Data Systems Corporation. Few of the Company's competitors compete
in all of the same markets as the Company.
The principal competitive factors affecting the markets for the Company's
product and professional services offerings include: (1) product
functionality, performance, reliability and ease of use, (2) quality of
technical support, training and consulting services, (3) responsiveness to
customer needs, (4) reputation, experience and financial stability and (5)
cost of ownership, including initial price and deployment costs as well as
ongoing maintenance costs. Due to the continued increase in new product
licenses and professional services revenues, the Company believes that it has
competed effectively in each of these areas. Nevertheless, current and
potential competitors may introduce new and better products, make strategic
acquisitions, or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of the Company's current and prospective customers.
PROPRIETARY RIGHTS
The products sold by the Company consist of products developed by SAG (e.g.,
ADABAS, NATURAL and ENTIRE), products owned by other third parties which are
distributed by the Company (e.g., iXpress) and products developed or acquired
by the Company (i.e., INSIGHT 2000 Tool Kit, CONSTRUCT, CONSTRUCT Spectrum and
CONSTRUCT Spectrum SDK). For all of these products, the Company, if not the
developer, is contractually obligated to provide appropriate security measures
to protect the proprietary materials of SAG and other third parties against
misappropriation and illegal copying.
The Company treats all of the products that it distributes as proprietary
trade secrets and confidential information. It relies primarily upon a
combination of trade secret, copyright and trademark laws, its license
agreements with customers, and its internal security systems, confidentiality
procedures and employee agreements to maintain the security of its products.
The Company typically provides its products to users under nonexclusive,
nontransferable perpetual licenses which generally permit use of the licensed
software solely for internal operations on designated computers at specific
sites. Under certain circumstances, the Company makes available the source
code for its products under an escrow arrangement which restricts access to
and use of the source code. Although the Company takes steps to protect its
trade secrets and other proprietary rights, there can be no assurance that
misappropriation will not occur. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as the laws of
the United States.
The Company seeks to protect its software, documentation and other written
materials under copyright law, and to assert trademark rights in its product
names. The Company has not sought to protect its products under patent laws,
though SAG and some third parties have patented, in the United States, Japan
and/or the European Union, certain of the products which the Company
distributes.
Although the Company is not aware of any claims that its products,
trademarks or other proprietary rights infringe on the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current
and future products or that any such assertion may not require the Company to
enter into royalty arrangements or result in costly litigation. See "Risk
Factors--Proprietary Rights."
EMPLOYEES
As of March 31, 1998, the Company employed 894 people, with 408 in
professional services and consulting, 142 in sales and marketing, 183 in
customer support, 27 in research and development and 134 in general and
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administrative functions. As of March 31, 1998, the Company also utilized
approximately 112 individuals under independent contracts. None of the
Company's employees is represented by a labor union, and the Company has never
experienced any work stoppage. The Company considers its relations with its
employees to be good. See "Risk Factors--Dependence on Key Personnel; Need to
Hire Additional Personnel."
PROPERTIES
The Company's executive offices, principal marketing and data center
facility are located in approximately 170,000 square feet of space in a three
building campus that the Company leases in Reston, Virginia. The Company's
Customer Service and Support Center is located in approximately 85,000 square
feet that the Company leases in Highlands Ranch, Colorado. The Company
currently sublets approximately 18,000 and 25,000 square feet of the Reston
and Highlands Ranch locations, respectively.
The Company's subsidiary in Mexico leases offices in Mexico City and
Monterrey, Mexico. As a result of the acquisition of R.D. Nickel, the Company
leases product sales and professional services branch offices in the following
cities in Canada: Calgary, Cambridge, Edmonton, Montreal, Ottawa and Toronto.
The Company leases product sales and professional services branch offices in
Irvine and Sacramento, California, Atlanta, Georgia, Chicago, Illinois,
Braintree, Massachusetts, Bloomington, Minnesota, Fort Lee, New Jersey,
Plymouth Meeting, Pennsylvania, Dallas, Texas, Bellevue, Washington and
Reston, Virginia in the United States.
The Company believes that its facilities are adequate for its current needs
and that suitable space will be available as needed to accommodate the
expansion of the Company's operations.
LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. The Company is not a
party to any litigation or other legal proceeding that, in the opinion of
management, could have a material adverse effect on the Company's business,
financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their respective
ages as of April 13, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Carl J. Rickertsen (1).. 38 Chairman of the Board
Daniel F. Gillis (2).... 51 President, Chief Executive Officer and Director
Harry K. McCreery....... 51 Vice President, Treasurer and Chief Financial Officer
Timothy L. Hill......... 39 Vice President--Marketing
Derek M. Brigden........ 46 Vice President--Operations and Chief Information Officer
David S. Linthicum...... 35 Vice President--Technology and Chief Technology Officer
Dr. Philip S. Dauber (1)
(3).................... 57 Director
Dr. Erwin Konigs........ 48 Director
Edward E. Lucente (3)... 58 Director
Dr. Paul G. Stern (1)... 59 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Employee Stock Option Committee.
(3) Member of the Audit Committee.
Carl J. Rickertsen has served as Chairman of the Board of the Company since
April 1997. Mr. Rickertsen is also a member of TC Equity Partners, LLC ("TC
Equity Partners") and TC Management LLC ("TC Management"), which are,
respectively, the sole general partner and managing agent of Thayer Equity
Investors III, L.P. ("Thayer"). Thayer is a private equity fund based in
Washington, D.C. that targets investments in the information technology and
services industries and its investors include corporations, pension funds and
financial institutions. From September 1994 to April 1996, Mr. Rickertsen was
a partner with Thayer Capital Partners, an affiliate of Thayer. Prior to that,
Mr. Rickertsen acted as a private financial consultant from 1993 through
August 1994, and was a partner at Hancock Park Associates, a private equity
investment firm based in Los Angeles, from 1989 to 1993. Before joining
Hancock Park Associates, Mr. Rickertsen was an associate at Brentwood
Associates from 1987 to 1989, and worked in the high technology group at
Morgan Stanley & Co., Inc. from 1983 to 1985. Mr. Rickertsen currently serves
as a director of MLC Holdings, Inc.
Daniel F. Gillis has served as President and Chief Executive Officer of the
Company since May 1996. He also has served as a director of the Company since
February 1997. Previously, Mr. Gillis served as Senior Vice President of U.S.
Sales of Software AG Americas, Inc., a wholly owned subsidiary of the Company
("Software Americas"), from April 1995 to May 1996 and as Vice President of
Federal Systems Sales of Software Americas from January 1995 to March 1995.
From August 1994 to January 1995, he was a private consultant. From May 1987
through August 1994, he served as Executive Vice President at Falcon
Microsystems Inc., a computer products reseller and systems integrator.
Harry K. McCreery has served as Vice President, Treasurer and Chief
Financial Officer of the Company since April 1997. He has also served as
Treasurer of Software Americas since May 1991, Chief Financial Officer of
Software Americas since June 1989 and Chief Information Officer of Software
Americas from June 1989 to December 1990.
Timothy L. Hill has served as Vice President--Marketing of the Company since
August 1997. Previously, Mr. Hill served as Vice President, Worldwide
Marketing & Sales for Iomega Corporation, a manufacturer of computer storage
products, from July 1994 through July 1997. From August 1993 through July
1994, Mr. Hill served as Vice President, Marketing for Falcon Microsystems
Inc. From January 1988 to August 1993, Mr. Hill served as Director of
Marketing & Sales, Consumer Business Division, at Gates Energy Products, a
manufacturer of consumer and commercial rechargeable battery products.
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Derek M. Brigden has served as Vice President--Operations and Chief
Information Officer of the Company since April 1997. He has also served as
Vice President--Operations and Chief Information Officer of Software Americas
since December 1990.
David S. Linthicum has served as Vice President--Technology and Chief
Technology Officer of the Company since December 1997. Prior to joining the
Company, Mr. Linthicum served as Senior Manager in the Center of Technology
Enablement for Ernst & Young LLP from June 1997 to December 1997. From April
1995 to June 1997, Mr. Linthicum served as Senior Manager, Systems Integration
Practice at AT&T Corporation. From December 1990 to April 1995, Mr. Linthicum
served as Technical Director, Treasury Department for Mobil Oil Corporation.
Dr. Philip S. Dauber has served as a director of the Company since April
1997. Dr. Dauber is an independent consultant providing services to several
companies including IQI, Inc., a telemarketing firm, where he served as acting
President from February 1997 through August 1997. Before becoming an
independent consultant, Dr. Dauber served as a Senior Vice President of Unisys
Corporation from 1981 to 1987 during which time he was also Chairman and Chief
Executive Officer of Memorex, Inc., a wholly owned subsidiary of Unisys
Corporation. Before joining Unisys Corporation, Dr. Dauber was employed by IBM
from 1965 to 1981 and served as secretary of its Corporate Management
Committee from 1980 to 1981.
Dr. Erwin Konigs has served as a director of the Company since December 1996
and was Chairman of the Board of the Company from December 1996 through March
1997. Dr. Konigs has served as Chairman of the Board of SAG since September
1996 and Chief Executive Officer of SAG since November 1996. From April 1989
to November 1996, Dr. Konigs was Chief Executive Officer of Linotype-Hell AG
in Eschborn, Germany, a supplier of prepress and publishing technology.
Edward E. Lucente has served as a director of the Company since April 1997.
Since January 1998, Mr. Lucente has served as President and Chief Executive
Officer of QMS, Inc., a manufacturer of laser printers. From May 1995 to
January 1998, Mr. Lucente served as the Chief Executive Officer and President
of Liant Software Corporation, a software development company. Previously, he
was a marketing consultant from May 1994 until April 1995, and Executive Vice
President of Sales and Marketing of Digital Equipment Corporation from March
1993 through April 1994. From February 1991 until March 1993, Mr. Lucente was
a Member of the Executive Office of Northern Telecom Limited, a supplier of
digital telecommunications systems, serving from January 1992 until March 1993
as an Executive Vice President of Northern Telecom Limited. Mr. Lucente
currently serves as a director of Information Resources, Inc.
Dr. Paul G. Stern has served as a director of the Company since April 1997.
Dr. Stern is also a member of TC Equity Partners and TC Management, which are,
respectively, the sole general partner and managing agent of Thayer. In 1995,
Dr. Stern joined Thayer as a co-founder. Prior to that, Dr. Stern was a
Special Limited Partner at Forstmann Little & Co., a private investment firm,
from June 1993 to June 1995. From March 1989 until June 1993, Dr. Stern served
as Chief Executive Officer and Chairman of the Board of Northern Telecom
Limited. Dr. Stern currently serves as a director of the Dow Chemical Company,
The LTV Corporation and Whirlpool Corporation.
The Company's Bylaws, as amended (the "Bylaws"), provide for the Company's
Board to be comprised of six directors. Pursuant to the Company's Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), the Board
is divided into three classes, as nearly equal in number as reasonably
possible, with terms currently expiring at the annual meeting of stockholders
of the Company to be held on May 18, 1998 (Mr. Gillis and Dr. Dauber), the
annual meeting of stockholders to be held in 1999 (Dr. Konigs and Mr. Lucente)
and the annual meeting of stockholders to be held in 2000 (Mr. Rickertsen and
Dr. Stern). Each director will hold office for the term to which he is elected
and until his successor is duly elected and qualified or until his earlier
death, resignation or removal.
Executive officers of the Company are elected by the Board on an annual
basis and serve until the first meeting of the Board following the next annual
meeting of stockholders following their election and until their
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successors have been duly elected and qualified or until their earlier death,
resignation or removal. There are no family relationships among any of the
executive officers or directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The committees of the Board are an Audit Committee, a Compensation Committee
and an Employee Stock Option Committee ("Stock Option Committee").
Dr. Dauber and Mr. Lucente (Chairman) are presently the members of the Audit
Committee. The Audit Committee has certain duties relating to the year-end
audit, the Company's accounting methods and internal accounting controls and
the Company's relationship with its independent public accountants, including
making recommendations concerning the engagement of independent public
accountants, reviewing with the Company's independent public accountants the
plans and results of the audit engagement and approving professional services
provided by the Company's independent public accountants.
Mr. Rickertsen (Chairman) and Drs. Stern and Dauber are presently the
members of the Compensation Committee. The Compensation Committee is
responsible for determining the compensation of the Company's Chief Executive
Officer and other executive officers and establishing policies and guidelines
regarding the compensation of other officers and employees of the Company and
its subsidiaries. The Compensation Committee is also authorized to administer
the Company's 1997 Employee Stock Option Plan ("Option Plan"), including the
power to grant stock options. The Compensation Committee will also be
authorized to administer the Company's Employee Stock Purchase Plan if the
stockholders approve such plan at the annual meeting to be held on May 18,
1998.
In February 1998, the Board created the Stock Option Committee and appointed
Mr. Gillis as its sole member. The Stock Option Committee's function is to
grant stock options under the Option Plan to persons who are not (or who will
not be) at the time of such grant subject to the requirements of Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), pursuant
to guidelines and limitations determined by the Board. The Stock Option
Committee is not authorized to grant any stock option under the Option Plan to
any person who reports directly to any member of the Stock Option Committee or
to grant any stock option under the Option Plan that covers more than 10,000
shares of Common Stock without the prior consent and approval of the
Compensation Committee. All grants of stock options made by the Stock Option
Committee will be reported to the Compensation Committee on a regular basis.
The Company does not have a standing nominating committee or other committee
performing similar functions.
DIRECTOR COMPENSATION
Except for grants of stock options under the Option Plan, the Company's
directors were not compensated during 1997 for any services provided as
directors and did not receive during such fiscal year any benefits or other
forms of compensation, cash or otherwise, from the Company for their service
as directors. Except for grants of stock options that may be made under the
Option Plan, the Company has no present plans to pay such benefits or
compensation to directors. The Company reimburses directors for certain out-
of-pocket expenses incurred in connection with attendance at Board of
Directors and committee meetings.
Both employee and non-employee directors are eligible to be granted stock
options pursuant to the Option Plan. Under the Option Plan, Dr. Dauber and Mr.
Lucente were each granted options on June 23, 1997 to purchase 54,450 shares
of Common Stock at an exercise price of $1.47 per share. The options vest in
equal annual installments of 25%, with the first installment vesting March 31,
1998, and each of the subsequent installments vesting on the first, second and
third anniversaries of March 31, 1998. The options will become immediately
exercisable in full upon a change in control of the Company and may be
partially accelerated in connection with the termination of the director's
service as a director of the Company. Mr. Gillis is the President and Chief
Executive Officer of the Company and is not separately compensated as a
director of
47
<PAGE>
the Company. In fiscal year 1997, Mr. Gillis was granted stock options under
the Option Plan. See "--Executive Compensation."
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company whose annual salary and
bonus compensation (determined as of December 31, 1997) exceeded $100,000
(collectively, the "Named Executive Officers" and individually, the "Named
Executive Officer") for the fiscal years ended December 31, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (1) OPTIONS (#) (2) COMPENSATION ($) (3)
- --------------------------- ---- ---------- --------- -------------------- --------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel F. Gillis (4).... 1997 275,002 340,500 -- 2,392,500 194,461
President and Chief 1996 249,039 240,500 24,000 -- 179,671
Executive Officer
Harry K. McCreery (5)... 1997 174,711 236,500 -- 1,288,100 242,317
Vice President, 1996 170,000 132,600 -- -- 235,933
Treasurer and Chief
Financial Officer
Derek M. Brigden (5).... 1997 153,969 100,100 -- 114,125 7,500
Vice President-- 1996 150,000 101,346 -- -- 7,500
Operations and Chief
Information Officer
James H. Daly (5) (6)... 1997 149,938 97,500 30,000 114,125 169,427
Vice President, 1996 142,000 92,300 20,208 -- 159,183
Secretary and General
Counsel
Thomas E. Gorley (5) 1997 149,808 97,500 -- 114,125 7,500
(7).................... 1996 105,769 -- 63,461 -- 6,000
Vice President--
Professional
Services
</TABLE>
- --------
(1) Consists of sales commissions paid to the Named Executive Officer. In
accordance with the rules of the Commission, other compensation in the
form of perquisites and other personal benefits has been omitted because
such perquisites and other personal benefits constituted in the aggregate
less than the lesser of $50,000 or 10% of the total annual salary and
bonus reported for the Named Executive Officer during each of 1996 and
1997.
(2) All figures in this column reflect shares of Common Stock subject to
options granted under the Option Plan.
(3) Unless otherwise indicated, consists of (i) amounts of deferred
compensation earned and credited to deferred compensation accounts of the
Named Executive Officer and (ii) $7,500 of contributions paid by the
Company on behalf of the Named Executive Officer under the Company's
401(k) Plan. See "--Deferred Compensation Agreements." The Company does
not have any long-term incentive plans.
(4) Mr. Gillis served as President and Chief Executive Officer of the Company
from May 6, 1996.
(5) In 1996, these individuals served as executive officers of Software
Americas and performed policy-making functions for both Software Americas
and the Company.
(6) Mr. Daly's employment with the Company and Software Americas terminated
effective April 10, 1998.
(7) Mr. Gorley's employment with the Company and Software Americas terminated
effective January 9, 1998.
48
<PAGE>
The following table sets forth information concerning the grant of stock
options to each of the Named Executive Officers in 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES EXERCISE OR GRANT
UNDERLYING IN FISCAL BASE PRICE EXPIRATION DATE PRESENT
OPTIONS GRANTED (1) YEAR 1997 ($/SH) DATE VALUE ($) (11)
------------------- ------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Daniel F. Gillis........ 1,430,000 (2) 28.2 1.47 06/23/04 832,541
357,500 (3) 7.0 9.60 08/08/04 930,860
605,000 (4) 11.9 12.00 09/24/04 3,235,353
Harry K. McCreery....... 770,000 (2) 15.2 1.47 06/23/04 448,291
192,500 (3) 3.8 9.60 08/08/04 501,232
325,600 (4) 6.4 12.00 09/24/04 1,741,208
James H. Daly........... 68,200 (5) 1.3 1.47 06/23/04 36,390
17,050 (3) 0.3 9.60 08/08/04 67,027
28,875 (6) 0.6 12.00 09/24/04 118,243
Derek M. Brigden........ 68,200 (7) 1.3 1.47 06/23/04 36,390
17,050 (3) 0.3 9.60 08/08/04 67,027
28,875 (8) 0.6 12.00 09/24/04 118,243
Thomas E. Gorley........ 68,200 (9) 1.3 1.47 06/23/04 36,390
17,050 (3) 0.3 9.60 08/08/04 67,027
28,875 (10) 0.6 12.00 09/24/04 118,243
</TABLE>
- --------
(1) Options will become immediately exercisable if (i) 51% of the voting
stock of the Company is beneficially owned, directly or indirectly, by
any person or group of person(s) (as defined in Section 13(d) and 14(d)
of the Exchange Act) together with its affiliates, excluding employee
benefit plans of the Company, (ii) the stockholders of the Company
approve a merger or consolidation of the Company and another entity
unless the merger or consolidation results in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
at least 50% of the combined voting securities of the surviving entity
immediately after the merger or consolidation or (iii) the stockholders
of the Company approve a plan of complete liquidation or winding-up of
the Company or an agreement for the sale or disposition by the Company of
all or substantially all of the Company's assets. Options may be
partially accelerated in connection with the Named Executive Officers
termination of employment with the Company. Each option was granted under
the Company's 1997 Stock Option Plan and has an exercise price equal to
the fair market value of the Common Stock on the date of grant.
(2) Each of the indicated options granted vests as to one-third ( 1/3) of the
securities underlying the options granted on each of the first, second
and third anniversaries of March 31, 1997.
(3) Each of the indicated options granted vested on August 8, 1997.
49
<PAGE>
(4) Each of the indicated options granted vests as to one-third ( 1/3) of the
securities underlying the options granted on each of the first, second and
third anniversaries of September 24, 1997.
(5) Due to Mr. Daly's termination of employment with the Company, one-half (
1/2) of the indicated options expired prior to vesting.
(6) Due to Mr. Daly's termination of employment with the Company, all of the
indicated options expired prior to vesting.
(7) The indicated options granted vest as to one-fourth ( 1/4) of the
securities underlying the options granted on each of the first, second and
third anniversaries of June 23, 1997.
(8) The indicated options granted vest as to one-fourth ( 1/4) of the
securities underlying the options granted on each of the first, second and
third anniversaries of September 24, 1997.
(9) Due to Mr. Gorley's termination of employment with the Company, one-fourth
( 1/4) of the indicated options vested immediately prior to his
termination on January 9, 1998 and the remaining indicated options expired
prior to vesting.
(10) Due to Mr. Gorley's termination of employment with the Company, all of
the indicated options expired prior to vesting.
(11) The fair market value of each option granted is estimated on the Grant
Date using the Black-Scholes option pricing model. The Black-Scholes
model used the following factors: risk-free rate of return of 6%;
dividend yield of 0%; exercise term of 2 to 6 years; stock price
volatility of 40%; and a forfeitures rate of 2.9%.
No stock options were exercised during 1997. The following table sets forth
information with respect to outstanding unexercised options held by the Named
Executive Officers as of December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE (#) EXERCISABLE UNEXERCISABLE ($)
- ---- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Daniel F. Gillis........ 357,500 2,035,000 1,751,750 20,145,400
Harry K. McCreery....... 192,500 1,095,600 943,250 10,847,100
Derek M. Brigden........ 17,050 97,075 83,545 960,834
James H. Daly (1)....... 17,050 97,075 83,545 960,834
Thomas E. Gorley (2).... 17,050 97,075 83,545 960,834
</TABLE>
- --------
(1) Mr. Daly's employment with the Company terminated effective April 10,
1998.
(2) Mr. Gorley's employment with the Company terminated effective January 9,
1998.
DEFERRED COMPENSATION AGREEMENTS
The Company has entered into deferred compensation agreements with Messrs.
Gillis, McCreery and Daly (the "Deferred Compensation Agreements"). Pursuant
to these agreements, each of Messrs. Gillis, McCreery and Daly annually
receive a credit of $41,838, $46,000 and $24,000, respectively, to his
deferred compensation account plus an additional credit to such account equal
to 53%, 100% and 120%, respectively, of his bonus for such year. The deferred
compensation accounts earn interest at an annual rate of 6%. Under the
Deferred Compensation Agreements, no additional credits, other than interest,
will be made to any of the deferred compensation accounts after December 31,
1998. The deferred compensation accounts of Messrs. McCreery and Daly are
fully vested. Mr. Gillis' deferred compensation account is currently 60%
vested and will vest in full as of December 31, 1998. Except under certain
circumstances, upon termination of employment, each of Messrs. Gillis,
McCreery and Daly is entitled to receive from the Company payments totaling
the vested portion of his deferred compensation account.
50
<PAGE>
SEVERANCE AGREEMENTS
Mr. Gillis has entered into a memorandum of understanding with the Company
with respect to the termination of his employment as President and Chief
Executive Officer of the Company. Under this agreement, the Company is
required to pay Mr. Gillis a severance benefit equal to twelve months of his
then-current salary plus annual bonus ($460,000 minimum payment) and, for a
period not to exceed twelve months, to continue to make available his health
and other fringe benefits if (i) the Company terminates his employment other
than for cause or (ii) he resigns within ninety days of a substantial change
in his title or a substantial reduction in his compensation and benefits or
job responsibilities.
Each of Messrs. McCreery, Brigden, Gorley and Daly has entered into a
memorandum of understanding with the Company with respect to the termination
of his employment on terms and conditions substantially similar to Mr. Gillis'
memorandum of understanding with the Company, provided, however, that (i) the
severance benefit due each such executive officer upon termination under his
respective memorandum of understanding is equal to twelve months of his then-
current salary plus a pro-rated bonus payment, and (ii) no severance or other
benefits are due under these agreements if the executive officer resigns
within ninety days of a substantial reduction in his compensation and benefits
related to a Company wide reduction or a substantial reduction in his job
responsibilities that is deemed to be in the best business interests of the
Company.
Mr. Gorley's employment terminated effective January 9, 1998. The payments
due Mr. Gorley from the Company totaled $159,500 (included a severance payment
of $150,000, a car allowance payment of $7,200 and vacation pay of $2,300).
Mr. Gorley received a net payment from the Company of $84,500 after repayment
of a note made by Mr. Gorley to the Company in the amount of $75,000 which was
deducted from the gross amount due Mr. Gorley. Mr. Gorley paid the interest
due on the note of approximately $2,300.
Mr. Daly's employment with the Company terminated effective April 10, 1998.
The payments due Mr. Daly from the Company totaled $823,897 (included a
severance payment of $150,000, an incentive bonus payment of $21,875, a
deferred compensation payment of $639,777, a car allowance payment of $9,000
and vacation and regular pay of $3,245). Mr. Daly received a net payment from
the Company of $205,503 (net of taxes) after repayment of a note made by Mr.
Daly to the Company in the amount of $350,453 plus accrued interest of $23,554
which was deducted from the gross amount due Mr. Daly.
Pursuant to the terms of a Shareholders Agreement dated as of April 1, 1997,
each of Messrs. Gillis, McCreery, Brigden, Daly and Gorley has agreed that (i)
prior to the fifth anniversary of the termination of his employment with the
Company, he will not influence any employee to leave the Company, and (ii)
prior to the third anniversary of the termination of his employment with the
Company (unless such termination is by the Company without cause), he will not
directly or indirectly compete with the Company by soliciting any of its
customers, clients or suppliers. Mr. Hill has agreed to similar restrictions
pursuant to a subscription agreement between Mr. Hill and the Company dated as
of August 22, 1997, as amended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1997, the Company did not have a Compensation Committee or
other committee of the Board of Directors performing an equivalent function,
and the compensation of the Company's executive officers was determined by the
Company's Board of Directors. Since April 29, 1997, the Compensation Committee
of the Company's Board of Directors has been comprised of Mr. Rickertsen and
Drs. Stern and Dauber. Mr. Rickertsen and Dr. Stern are members of TC Equity
Partners, LLC, which is the sole general partner of Thayer, a stockholder of
the Company.
51
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
On March 31, 1997, the senior management of the Company and Thayer acquired
approximately 89% of the then outstanding Common Stock of the Company (the
"Recapitalization") pursuant to an agreement among the Company, SAG, Thayer
and the following persons who constituted the senior managers of the Company
at that time: Daniel F. Gillis, Harry K. McCreery, Gary Hayes, James H. Daly,
Derek M. Brigden and Thomas E. Gorley (collectively, such individuals are
referred to as the "Managers"). Prior to the Recapitalization, SAG owned all
of the Company's 27,500,000 then outstanding shares of Common Stock. In
connection with the Recapitalization, the Company (i) repurchased 24,750,000
shares of Common Stock from SAG for an aggregate purchase price of DM57.0
million (US$33.9 million) and (ii) issued and sold 20,678,350 shares of Common
Stock to Thayer and an aggregate of 771,650 shares of Common Stock to the
Managers for an aggregate purchase price of $31,526,820, or $1.47 per share.
Of the Common Stock purchased by the Managers, Messrs. Gillis and McCreery
each purchased 204,050 shares and Messrs. Hayes, Daly, Brigden and Gorley
purchased 84,975, 108,625, 67,925 and 102,025 shares, respectively. After the
Recapitalization, SAG retained 2,750,000 shares of Common Stock, representing
approximately 11% of the then outstanding Common Stock. Dr. Erwin Konigs, the
Chairman of the Board and Chief Executive Officer of SAG, is currently a
director of the Company. As a result of the Recapitalization, Thayer and the
Managers respectively owned 85.4% and 3.2% of the then outstanding Common
Stock. Dr. Stern and Mr. Rickertsen, directors of the Company, are members of
TC Equity Partners, which is the sole general partner of Thayer. In addition,
Mr. Gillis is currently, and was at the time of the Recapitalization, a
director of the Company.
Certain Managers borrowed money from the Company to purchase the Company's
Common Stock in the Recapitalization and executed promissory notes to reflect
such borrowings. Messrs. Gillis, McCreery and Daly borrowed $250,000, $250,000
and $182,605, respectively, from the Company under individual promissory
notes, each of which is dated March 24, 1997, and Messrs. McCreery and Daly
borrowed $363,000 and $120,740, respectively, from the Company under
individual promissory notes, each of which is dated August 9, 1996. Each of
the promissory notes accrues interest at the rate of 6% per annum and is due
and payable upon termination of its maker's employment with the Company. None
of the promissory notes require periodic interest or principal payments. As of
December 31, 1997, the amount outstanding under each promissory note equaled
the entire amount borrowed plus accrued interest.
In connection with the Recapitalization, on March 31, 1997, the Company
borrowed $5,000,000 from Thayer under a short-term note agreement for working
capital requirements. This note accrued interest at a simple rate equal to 10%
per annum and was repaid on April 11, 1997. In addition, the Company paid to
TC Management a financial advisory fee of $840,000 in consideration for
investment banking and advisory services provided by TC Management in
connection with the Recapitalization, and reimbursed TC Management for its
out-of-pocket expenses in connection with the Recapitalization. On April 1,
1997, the Company also agreed to pay on a quarterly basis an annual fee of
$300,000 to TC Management for management and consulting services to be
provided by TC Management to the Company in connection with the operation and
conduct of the Company's business. In fiscal year 1997, the Company paid a
total of $225,000 of such fees plus out-of-pocket expenses and as of March 20,
1998, the Company has paid $75,000 of such fees plus out-of-pocket expenses
for services in fiscal year 1998. TC Management is the managing agent of and
provides management services to Thayer. Dr. Stern and Mr. Rickertsen,
directors of the Company, are members of TC Management. In connection with the
Recapitalization, the Company also paid a one-time advisory fee of $250,000 to
MLC Group, Inc., a wholly owned operating subsidiary of MLC Holdings, Inc. Mr.
Rickertsen, a director of the Company, is a director of MLC Holdings, Inc.
Prior to the Recapitalization, the Company licensed and serviced SAG
products pursuant to a license agreement entered into by SAG and the Company
on January 1, 1995 (the "License Agreement"). The License Agreement gave the
Company the exclusive right to license and service SAG products in North
America, South America, Japan and Israel (the "Territory"), and gave SAG the
exclusive right to license and service the Company's products in all other
areas. Immediately prior to the Recapitalization, the Company and SAG entered
into a cooperation agreement dated March 31, 1997 (the "Cooperation
Agreement"), which terminated and
52
<PAGE>
superseded the License Agreement. The Cooperation Agreement generally (i)
provides the Company the exclusive and perpetual right to license and service
in the Territory both existing and future products developed or acquired by
SAG and (ii) provides SAG the exclusive and perpetual right to license and
service outside the Territory both existing and future products developed or
acquired by the Company. Each of the Company and SAG must pay the other 24% of
the net revenues derived from such licenses. Except in certain circumstances,
the Company's minimum annual royalty payment to SAG through the year 2000 must
at least equal $21 million. This 24% royalty rate is fixed for 20 years. In
1995, 1996 and 1997, the Company's royalty payments to SAG were approximately
$23.9 million, $26.1 million and $29.3 million, respectively. In the same
periods, SAG's royalty payments to the Company were approximately $0.3
million, $0.3 million and $0.6 million, respectively. As consideration for the
Cooperation Agreement, the Company paid SAG DM38.0 million (approximately
US$22.6 million) on March 31, 1997.
On December 5, 1993, the Company and SAG entered into a Products and
Research & Development Operations Transfer Agreement (the "R&D Agreement")
which required the Company to provide certain services relating to certain SAG
employees who utilized the Company's facilities. In connection with the
Recapitalization, on March 31, 1997, the Company entered into an
Administrative Services Agreement (the "ASA") with SAG, terminating the R&D
Agreement and requiring that the Company provide services similar to those
required under the R&D Agreement. SAG is required under the ASA to reimburse
the Company for its costs incurred in connection with the ASA and to pay the
Company $500,000 per year during the years 1997, 1998 and 1999 for the use of
certain machinery leased by the Company. In 1995, 1996 and 1997, the payments
to the Company under the R&D Agreement and the ASA were approximately $8.8
million, $15.9 million and $10.8 million, respectively.
From 1988 until the Recapitalization, the Company was a wholly owned
subsidiary of SAG. Accordingly, during that period, there were a variety of
intercompany transactions, including loans and dividends, between the Company
and SAG. Except as described above, all of these transactions that were
material terminated in connection with the Recapitalization.
On August 22, 1997, the Company entered into a subscription agreement with
Timothy L. Hill, the Company's Vice President--Marketing, pursuant to which
the Company issued and sold to Mr. Hill 137,500 shares of Common Stock for an
aggregate purchase price of $202,095 (the "Subscription Agreement"). Pursuant
to the Subscription Agreement, the Company has the right to repurchase Mr.
Hill's shares at $1.47 per share if Mr. Hill's employment with the Company is
terminated for cause or if Mr. Hill voluntarily terminates his employment
prior to August 17, 1999. The Company's repurchase right terminates in the
event of change of control of the Company. In addition, the Company has issued
options to purchase an aggregate of 94,325 shares of Common Stock at an
exercise price of $1.47 to the members of Thayer's Advisory Board.
The Company and Thayer have entered into a registration rights agreement for
the benefit of all holders as of September 26, 1997 of "restricted securities"
of the Company within the meaning of Rule 144 of the Commission, and certain
transferees of such holders. Pursuant to this agreement, a majority-in-
interest of such holders has the right to require the Company to register
their restricted securities for resale under the Securities Act on up to five
occasions (only one of which may be on Form S-1) and such holders have been
granted certain "piggy-back" registration rights with regard to certain
securities offerings initiated by the Company. The Company has agreed to pay
certain expenses in connection with such registrations.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of April 13,
1998 and as adjusted to reflect the sale of the shares pursuant to this
offering, by (i) each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director and
Named Executive Officer of the Company, (iii) all directors and executive
officers of the Company as a group and (iv) each Selling Stockholder. Except
as otherwise indicated below, to the knowledge of the Company, each person
listed below has sole voting power and investment power with respect to the
shares beneficially owned by such person, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
SHARES SHARES TO BE SHARES
BENEFICIALLY OWNED SOLD IN BENEFICIALLY OWNED
PRIOR TO OFFERING (2) OFFERING (3) AFTER OFFERING (2)
------------------------------------- ------------------
NAME AND ADDRESS (1) NUMBER PERCENT NUMBER PERCENT
- -------------------- ------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Thayer Equity Investors
III, L.P............... 16,551,559 56.0% 5,000,000 11,511,559 38.6%
1455 Pennsylvania
Avenue, N.W.
Washington, DC 20004
Software AG............. 2,750,000 9.3 -- 2,750,000 9.2
Uhlandstrasse 12, 64297
Darmstadt, Germany
TC Co-Investors, LLC.... 89,866 * 27,150 62,716 *
1455 Pennsylvania
Avenue, N.W.
Washington, DC 20004
Daniel F. Gillis (4).... 1,048,317 3.5 200,000 848,317 2.8
Harry K. McCreery (5)... 653,217 2.2 150,000 503,217 1.7
James H. Daly (6)....... 159,775 * -- 159,775 *
Derek M. Brigden (7).... 102,025 * 19,700 82,325 *
Thomas E. Gorley (7).... 136,125 * -- 136,125 *
Carl J. Rickertsen (8).. 16,649,425 56.4 5,027,150 11,622,275 38.8
Dr. Philip S. Dauber
(9).................... 81,538 * -- 81,538 *
Dr. Erwin Konigs (10)... 2,852,025 9.7 25,000 2,827,025 9.4
Edward E. Lucente (11).. 13,613 * -- 13,613 *
Dr. Paul G. Stern (8)... 16,641,425 56.4 5,027,150 11,614,275 38.8
Gary Hayes (12)......... 103,838 * 16,362 87,476 *
Volker Dawedeit (13).... 67,925 * 22,000 45,925 *
All directors and
executive officers as a
group (10 persons)
(14)................... 21,538,210 69.8 5,421,850 16,116,360 52.2
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) The business address for Messrs. Gillis, McCreery, Brigden and Hayes is
11190 Sunrise Valley Drive, Reston, Virginia, 20191. The business address
for Mr. Rickertsen and Dr. Stern is c/o Thayer Equity Investors III,
L.P., 1455 Pennsylvania Avenue, N.W., Washington, DC 20004. The business
address for Mr. Dawedeit and Dr. Konigs is c/o Software AG, Uhlandstrasse
12, 64297 Darmstadt, Germany. The business address for Mr. Lucente is 1
Magnum Pass, Mobile, Alabama 36618.
(2) The number of shares of Common Stock outstanding prior to this offering
includes (i) 29,531,391 shares of Common Stock outstanding as of April
13, 1998 and (ii) with respect to each person, the shares of Common Stock
issuable by the Company pursuant to options held by such persons which
may be exercised within 60 days following April 13, 1998 ("Presently
Exercisable Options"). The number of shares of
54
<PAGE>
Common Stock deemed outstanding after this offering includes an additional
386,062 shares that are being offered for sale by certain Selling
Stockholders pursuant to the exercise by such Selling Stockholders of
Presently Exercisable Options prior to the consummation of this offering.
Beneficial ownership is determined in accordance with the rules of the
Commission that deem shares to be beneficially owned by any person or group
who has or shares voting and investment power with respect to such shares.
Presently Exercisable Options are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person or group.
(3) If the Underwriters exercise their over-allotment option to purchase up to
819,031 shares, the following stockholders named in the table above will
sell up to the following number of additional shares: Thayer Equity
Investors III, L.P., 814,606 shares; and TC Co-Investors, LLC 4,425
shares.
(4) Includes 834,167 shares subject to Presently Exercisable Options.
(5) Includes 449,167 shares subject to Presently Exercisable Options.
(6) Includes 51,150 shares subject to Presently Exercisable Options.
(7) Includes 34,100 shares subject to Presently Exercisable Options.
(8) Includes 16,551,559 shares held of record by Thayer and 89,866 shares held
of record by TC Co-Investors, LLC ("TC Co-Investors"). Thayer is a
Delaware limited partnership whose sole general partner is TC Equity
Partners, a Delaware limited liability company. TC Equity Partners
beneficially owns, and has sole voting and investment power with respect
to, the shares of Common Stock held of record by Thayer. TC Co-Investors
is a Delaware limited liability company whose managing member is TC
Management. TC Management beneficially owns, and has sole voting and
investment power with respect to, the shares of Common Stock held of
record by TC Co-Investors. Frederic V. Malek, Dr. Paul G. Stern and Carl
J. Rickertsen are the members of TC Management and the principal members
of TC Equity Partners. Dr. Stern and Mr. Rickertsen may be deemed to be
the beneficial owners of the shares of Common Stock held by each of Thayer
and TC Co-Investors.
(9) Includes (i) 67,925 shares held of record by PSERD Trust, of which Dr.
Dauber is a trustee, and (ii) 13,613 shares subject to Presently
Exercisable Options. Dr. Dauber shares voting and investment power with
respect to all shares held by PSERD Trust and may be deemed to be the
beneficial owner of all such shares.
(10) 2,750,000 of the reported shares are held of record by SAG. Dr. Konigs, a
director of the Company, is the Chairman of the Board and Chief Executive
Officer of SAG, and may be deemed to have or share voting and investment
power with respect to all shares held of record by SAG. Dr. Konigs
disclaims beneficial ownership of all shares held of record by SAG.
(11) Includes 13,613 shares subject to Presently Exercisable Options.
(12) Includes 16,362 shares subject to Presently Exercisable Options. Mr. Hayes
has served as Controller and a Vice President of the Company since April
1997 and as a Vice President and Controller of Software Americas since May
1995.
(13) Mr. Dawedeit has served as the Chief Financial Officer and a director of
SAG since January 1997.
(14) Includes (i) 16,551,559 shares held of record by Thayer, (ii) 2,750,000
shares held of record by SAG, (iii) 89,866 shares held of record by TC Co-
Investors, (iv) 67,925 shares held of record by PSERD Trust, and (v)
1,344,660 shares subject to Presently Exercisable Options (369,700 of
which are being offered for sale in this offering by Messrs. Gillis,
McCreery and Brigden). See footnotes (2) through (13). Does not include
102,025 shares beneficially owned by Mr. Gorley or 34,100 shares subject
to Presently Exercisable Options granted to Mr. Gorley, whose employment
with the Company terminated on January 9, 1998. Also does not include
159,775 shares beneficially owned by Mr. Daly or 51,150 shares subject to
Presently Exercisable Options granted to Mr. Daly, whose employment with
the Company terminated effective April 10, 1998.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 75,000,000 shares of
Common Stock, $0.01 par value per share, and 25,000,000 shares of preferred
stock, $0.01 par value per share (the "Preferred Stock"). As of April 13,
1998, there were 29,531,391 shares of Common Stock outstanding held of record
by 42 stockholders and no shares of Preferred Stock outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of applicable law and by the
Company's Certificate of Incorporation, a copy of which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted on by stockholders. There are no cumulative voting rights. All
outstanding shares of Common Stock are, and all shares of Common Stock issued
and sold in this offering will be, duly authorized, validly issued, fully paid
and nonassessable. Subject to such preferential rights as may be granted by
the Board of Directors in connection with the issuance of Preferred Stock,
distributions may be paid to the holders of Common Stock when, as and if
declared by the Board of Directors out of funds legally available therefore.
The Company does not intend to pay cash dividends on its Common Stock in the
foreseeable future. See "Dividend Policy." Holders of Common Stock have no
preemptive or other rights to subscribe for additional shares of Common Stock,
redemption rights or conversion rights. Upon liquidation, dissolution or
winding up of the Company, the holders of the Common Stock are entitled to
share ratably in all assets of the Company that are legally available for
distribution after payment of all debts and other liabilities and subject to
any prior rights of holders of Preferred Stock, if any, then outstanding.
PREFERRED STOCK
The Board of Directors has authority to issue 25,000,000 shares of Preferred
Stock in one or more series and to fix the relative rights, preferences,
privileges, qualifications, limitations and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Board of Directors could,
without the approval of the stockholders, issue Preferred Stock having voting
or conversion rights that could adversely affect the voting power of the
holders of Common Stock, and the issuance of Preferred Stock could be used,
under certain circumstances, to render more difficult or discourage a hostile
takeover of the Company. The Company has no present plans to issue any shares
of Preferred Stock.
LIMITATION ON LIABILITY AND INDEMNIFICATION OF DIRECTORS
The Company has adopted provisions in its Certificate of Incorporation
limiting the liability of directors of the Company for monetary damages. The
effect of this provision in the Certificate of Incorporation is to eliminate
the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against
a director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in
certain limited situations. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of
care. The provisions of the Certificate of Incorporation described above apply
to an officer of the Company only if he or she is a director of the Company
and is acting in his or her capacity as director, and do not apply to officers
of the Company who are not directors. These provisions will not alter the
liability of directors under federal securities laws.
The Company's Certificate of Incorporation and Bylaws contain provisions
indemnifying the directors and officers of the Company to the fullest extent
permitted by the Delaware General Corporate Law ("DGCL"). The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors and officers.
56
<PAGE>
CERTAIN PROVISIONS OF DELAWARE LAW, THE CERTIFICATE OF INCORPORATION AND THE
BYLAWS
The Company is subject to the provisions of Section 203 of the DGCL. Subject
to certain exceptions, Section 203 prohibits a Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the interested stockholder attained
such status with the approval of the Board of Directors, the business
combination is approved in a prescribed manner or certain other conditions are
satisfied. A "business combination" includes, among other transactions,
mergers, asset sales and other transactions resulting in a financial benefit
to the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns,
or within three years did own, 15% or more of the corporation's voting stock.
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise. These provisions are
intended to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control
of the Company to negotiate first with the Board of Directors. The Company
believes that the benefits of these provisions outweigh the potential
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals might result in an improvement of their terms.
Classified Board of Directors. The Certificate of Incorporation provides
that, upon consummation of an underwritten public offering of the Company's
Common Stock, the Board of Directors will be divided into three classes of
directors, each class constituting approximately one-third of the total number
of directors and the classes serving staggered three-year terms. The
classification of directors will have the effect of making it more difficult
for stockholders to change the composition of the Board of Directors. The
Company believes, however, that the longer time required to elect a majority
of a classified Board of Directors will help to ensure continuity and
stability of the Company's management and policies. The classification
provisions could also have the effect of discouraging a third party from
accumulating large blocks of the Company's Common Stock or attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. Accordingly, stockholders could be
deprived of certain opportunities to sell their shares of Common Stock at a
higher market price than might otherwise be the case. See "Management--
Executive Officers and Directors."
Number of Directors; Removal; Filling Vacancies. The Certificate of
Incorporation provides that the number of directors will be fixed by, or
determined pursuant to, the Bylaws. The Bylaws provide that the Board of
Directors shall consist of six directors and that the Board of Directors may
increase or decrease the number of directors. The Bylaws also provide that,
after consummation of an underwritten public offering of the Company's Common
Stock, the number of directors shall not be increased by 50% or more in any
12-month period without the approval of at least two-thirds of the directors
then in office. The Certificate of Incorporation provides that any vacancies
will be filled only by the affirmative vote of a majority of the remaining
directors then in office, even if less than a quorum. Accordingly, the Board
of Directors could temporarily prevent any stockholder from enlarging the
Board of Directors and filling the new directorships with such stockholder's
own nominees. The Certificate of Incorporation also provides that directors
(or the entire Board) may be removed from office by the stockholders for cause
by the vote of the holders of at least a majority of the Common Stock.
No Stockholder Action by Written Consent; Special Stockholder Meetings. The
Certificate of Incorporation provides that, after the consummation of an
underwritten public offering of the Company's Common Stock, stockholder action
can be taken only at an annual or special meeting of stockholders and can not
be taken by written consent in lieu of a meeting. The Bylaws provide that
special meetings of the stockholders may be called only by the Chairman of the
Board of Directors, a majority of the Board of Directors or the Chief
Executive Officer of the Company. These provisions may have the effect of
delaying consideration of a stockholder proposal until the next annual
stockholder meeting. These provisions may also discourage another person or
entity from making a tender offer for the Company's Common Stock.
57
<PAGE>
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The Bylaws establish an advance notice procedure for stockholders
to make nominations of candidates for election as directors or to bring other
business before an annual meeting of stockholders of the Company (the
"Stockholder Notice Procedure"). The Stockholder Notice Procedure provides
that (i) only persons who are nominated by, or at the direction of, the Board
of Directors, or by a stockholder who has given timely written notice
containing specified information to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company and (ii) at an annual meeting only such business may
be conducted as has been brought before the meeting by, or at the direction
of, the Board of Directors, or by a stockholder who has given timely written
notice to the Secretary of the Company of such stockholder's intention to
bring such business before the meeting. Subject to applicable law, notice of
stockholder nominations for submission at, or stockholder proposals for
business to be conducted at, an annual meeting of stockholders must be
received by the Company not less than 120 days nor more than 150 days prior to
the date of the release of the Corporation's proxy statement to stockholders
in connection with the previous year's annual meeting of stockholders, or not
later than 10 days following the day on which notice of the date of a special
meeting was given if the notice or proposal is to be submitted at a special
meeting.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders and
make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of stockholders.
Although the Bylaws do not give the Board of Directors any power to disapprove
stockholder nominations for the election of directors or proposals for action,
they may have the effect of precluding a contest for the election of directors
or the consideration of stockholder proposals if the proper procedures are not
followed and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to the Company and its stockholders.
Amendment of Certificate of Incorporation and Bylaws. The Certificate of
Incorporation provides that, after consummation of an underwritten public
offering of the Company's Common Stock, the provisions therein relating to the
staggered Board of Directors, the availability of action by written consent by
stockholders, removal of directors and filling of vacancies on the Board of
Directors may be amended, altered, changed or repealed only by the affirmative
vote of the holders of at least two-thirds of the voting power of all the
shares of capital stock then entitled to vote, voting as a single class. The
Certificate of Incorporation also provides that the Bylaws may be adopted,
amended, altered, changed or repealed by the affirmative vote of the majority
of the members of the Board of Directors. After consummation of an
underwritten public offering of the Company's Common Stock, any action taken
by the stockholders with respect to adopting, amending, altering, changing or
repealing any Bylaw may be taken only by the affirmative vote of the holders
of at least two-thirds of the voting power of all of the shares of capital
stock then entitled to vote generally in the election of directors, voting as
a single class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Bank of
New York.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market, or
the perception that such sales might occur, could adversely affect the market
price of the Common Stock and could impair the ability of the Company to raise
equity capital in the future.
Upon completion of the offering, the Company will have outstanding
29,917,453 shares of Common Stock. Assuming no exercise of the Underwriters'
over-allotment option, of these shares, 14,331,603 shares are freely tradable
in the public market without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except for any
shares held by "affiliates" of the Company, as that term is defined under the
Securities Act and the regulations promulgated thereunder (an "Affiliate").
The remaining 15,585,850 shares of Common Stock (the "Restricted Shares") held
by existing stockholders were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144.
Of the Restricted Shares, (i) 14,437,586 shares will be eligible for sale
beginning May 18, 1998 upon the expiration of the lockup agreements entered
into in connection with the IPO (11,636,574 of which will be subject to 90-day
lock-up agreements between certain stockholders and the Representatives of the
Underwriters), (ii) 375,141 shares will be eligible for sale beginning June
30, 1998 (185,666 of which will be subject to a 90-day lock-up agreement
between the holder thereof and the Representatives of the Underwriters), (iii)
137,500 shares will be eligible for sale beginning August 22, 1998 and (iv)
51,013 shares and 108,625 shares will be eligible for sale beginning January
10, 1999 and April 11, 1999, respectively.
The holders of 12,298,225 Restricted Shares have agreed with the
Representatives that, until 90 days from the effective date of the
Registration Statement of which this Prospectus is a part, subject to certain
limited exceptions, they will not, directly or indirectly, sell, offer,
contract to sell, pledge, grant any option to purchase or otherwise dispose of
any shares of Common Stock or any securities convertible into, or exchangeable
for, or any rights to purchase or acquire, shares of Common Stock, owned
directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens, one of the managing underwriters. BancAmerica Robertson Stephens
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the lockup-agreements.
In general, under Rule 144 as currently in effect, any holder of Restricted
Shares, including an Affiliate of the Company, as to which at least one year
has elapsed since the later of the date of the acquisition of such Restricted
Shares from the Company or an Affiliate, would be entitled within any three-
month period to sell a number of shares that does not exceed the greater of 1%
of the then outstanding shares of Common Stock (approximately 299,174 shares)
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. Affiliates of the Company must comply with the
restrictions and requirements of Rule 144 (except for the one-year holding
period requirement) in order to sell shares of Common Stock which are not
"restricted securities" (such as shares acquired by Affiliates in this
offering).
Further, under Rule 144(k) a person who holds restricted shares as to which
at least two years have elapsed since the later of their acquisition from the
Company or an Affiliate, and who is not deemed to have been an Affiliate of
the Company at any time during the three months preceding a sale, is entitled
to sell such shares under Rule 144 without regard to volume limitations,
manner of sale provisions, notice requirements or availability of current
public information concerning the Company.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.
59
<PAGE>
All holders of Restricted Shares have been granted certain rights to have
their shares of Common Stock registered for sale under the Securities Act. See
"Certain Relationships and Transactions."
On January 22, 1998, the Company filed a registration statement on Form S-8
under the Securities Act in order to register all 6,875,000 shares of Common
Stock reserved for issuance under the Company's Option Plan. In addition, on
April 2, 1998, the Company filed a registration statement on Form S-8 under
the Securities Act in order to register 1,500,000 shares of Common Stock for
issuance under the Company's Employee Stock Purchase Plan.
Sales of substantial amounts of Common Stock or the availability of such
shares for sale could adversely affect prevailing market prices of the Common
Stock.
60
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities
Corporation, Smith Barney Inc. and EVEREN Securities, Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Selling Stockholders the
number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all such shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens...................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
Smith Barney Inc.................................................
EVEREN Securities, Inc...........................................
---------
Total........................................................ 5,460,212
=========
</TABLE>
The Selling Stockholders have been advised by the Representatives that the
Underwriters propose to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not more than $ per
share, of which $ per share may be reallowed to other dealers. After the
completion of this offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Selling
Stockholders as set forth on the cover page of this Prospectus.
The Selling Stockholders have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase an aggregate of up to an additional 819,031 shares of Common Stock at
the same price per share as the Selling Stockholders receive for the 5,460,212
shares that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown
in the above table represents as a percentage of the 5,460,212 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters
on the same terms as those on which the 5,460,212 shares are being sold. The
Company and the Selling Stockholders subject to such over-allotment option
will be obligated, pursuant to the option, to sell shares to the Underwriters
to the extent the option is exercised. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of
shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act and liability
arising from breaches of representations and warranties contained in the
Underwriting Agreement or the inaccuracy of certain information set forth
herein that was provided by the Underwriters.
Pursuant to the terms of lock-up agreements, assuming no exercise of the
Underwriters' over-allotment option, the holders of 12,310,825 shares of the
Company's Common Stock (including the Selling Stockholders and after giving
effect to the sale of shares by such holders in this offering), have agreed,
for a period of up to 90 days from the effective date of the Registration
Statement of which this Prospectus is a part, that, subject to certain
exceptions, they will not contract to sell or otherwise dispose of any shares
of Common Stock, any options or warrants to purchase shares of Common Stock or
any securities convertible into, or exchangeable for,
61
<PAGE>
shares of Common Stock, owned directly by such holders or with respect to
which they have the power of disposition, without the prior written consent of
BancAmerica Robertson Stephens. However, BancAmerica Robertson Stephens may,
in its sole discretion, and at any time or from time to time, without notice,
release all or any portion of the securities subject to lock-up agreements.
All of the shares of Common Stock subject to the lock-up agreements will be
eligible for sale in the public market upon the expiration of the lock-up
agreements subject to Rule 144.
In addition, the Company has agreed that, until 90 days from the date of
this Prospectus, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, subject to certain exceptions, sell or
otherwise dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock other than the
issuance of Common Stock upon the exercise of outstanding options or the
Company's grant of options and issuance of stock under the existing employee
stock option or stock purchase plans. See "Shares Eligible for Future Sale."
The Representatives have advised the Selling Stockholders that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with this offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with this offering when shares of Common Stock sold by
the syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected, where permitted, on the NYSE or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
62
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Arnold & Porter,
Washington, D.C. Certain legal matters in connection with this offering will
be passed upon for the Underwriters by Hale and Dorr LLP, Washington, D.C.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 have been included in this Prospectus and elsewhere in
the Registration Statement in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can
be inspected and copied at the Public Reference Section maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
the following regional offices of the Commission: 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material also can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon receipt of the fees prescribed by the rules and
regulations of the Commission. Such material also may be accessed
electronically through of the Commission's Web site on the Internet at
"http://www.sec.gov". The Company's Common Stock is listed on the New York
Stock Exchange and reports, proxy statements and other information concerning
the Company can be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered pursuant to this Prospectus. This Prospectus does not
contain all of the information, exhibits and undertakings contained in the
Registration Statement, to which reference is hereby made. For further
information concerning the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from,
the Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in such instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
63
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Operations for each of the years in the two-
year period ended December 31, 1996 and the three-month and nine-month
periods ended March 31, 1997 and December 31, 1997, respectively........ F-5
Consolidated Statements of Stockholders' Equity for each of the years in
the two-year period ended December 31, 1996 and the three-month and
nine-month periods ended March 31, 1997 and December 31, 1997,
respectively............................................................ F-6
Consolidated Statements of Cash Flows for each of the years in the two-
year period ended December 31, 1996 and the three-month and nine-month
periods ended March 31, 1997 and December 31, 1997, respectively........ F-7
Notes to Consolidated Financial Statements............................... F-8
Unaudited Condensed Consolidated Balance Sheet as of March 31, 1998...... F-23
Unaudited Condensed Consolidated Statements of Operations for the three-
month periods ended March 31, 1997 and 1998............................. F-24
Unaudited Condensed Consolidated Statements of Cash Flows for the three-
month periods ended March 31, 1997 and 1998............................. F-25
Notes to Unaudited Condensed Consolidated Financial Statements........... F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Software AG Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Software AG
Systems, Inc. and subsidiaries (Successor) as of December 31, 1997, and of
Software AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of
Software AG, a German software company) (Predecessor) as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity
and cash flows for the periods from April 1, 1997 to December 31, 1997
(Successor periods), and from January 1, 1997 to March 31, 1997 and for each
of the years in the two-year period ended December 31, 1996 (Predecessor
periods). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the aforementioned Successor consolidated financial
statements present fairly, in all material respects, the financial position of
Software AG Systems, Inc. and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the financial position of Software
AG Systems, Inc. and subsidiaries (a wholly owned subsidiary of Software AG, a
German software company) as of December 31, 1996, and the results of their
operations and their cash flows for the Predecessor periods, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
April 1, 1997, Software AG Systems, Inc. consummated a Recapitalization under
which a majority of the Company's common stock changed control. The change in
control of the Company's common stock was accounted for as a purchase business
combination. As a result of the Recapitalization, the consolidated financial
information for the periods after the Recapitalization is presented on a
different cost basis than that for the periods before the Recapitalization
and, therefore, is not comparable.
/s/ KPMG Peat Marwick LLP
Washington, D.C.
February 6, 1998
F-2
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents............................. $ 25,773 $ 50,429
Accounts receivable:
Invoiced and currently due.......................... 35,369 40,212
Advanced billings on maintenance.................... 14,593 10,287
Unbilled services................................... 6,029 10,384
Installment......................................... 15,300 24,434
Other............................................... 1,059 2,858
Less: allowance for doubtful accounts............... (4,980) (9,301)
-------- --------
Total accounts receivable......................... 67,370 78,874
Notes receivable, SAG................................. 30,000 --
Current portion of deferred income taxes.............. 3,412 6,217
Prepaid expenses...................................... 3,298 1,371
Other current assets.................................. 2,686 2,663
-------- --------
Total current assets.............................. 132,539 139,554
Cooperation agreement, net of accumulated amortization.. -- 21,737
Installment accounts receivable, net of current
portion................................................ 10,955 8,932
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization.............. 8,923 10,077
Goodwill, net of accumulated amortization............... 589 11,286
Deferred income taxes................................... 1,469 2,848
Other assets............................................ 3,613 1,692
-------- --------
Total assets...................................... $158,088 $196,126
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current:
Accounts payable....................................... $ 6,773 $ 8,545
Accrued payroll and employee benefits.................. 10,792 10,170
Payable to SAG......................................... 33,317 10,050
Income taxes payable................................... 3,106 1,752
Other current liabilities.............................. 5,265 4,274
Current portion of deferred revenues, net of deferred
royalties of $7,923,000 in 1996 and $11,245,000 in
1997.................................................. 42,865 42,711
-------- --------
Total current liabilities.......................... 102,118 77,502
Deferred revenues, net of deferred royalties of
$7,415,000 in 1996 and $8,880,000 in 1997............... 23,472 28,806
Deferred gain............................................ 2,690 --
-------- --------
Total liabilities.................................. 128,280 106,308
Commitments and contingencies
Stockholders' equity:
Common stock ($0.01 par value; 55,000,000 shares
authorized, 27,500,000 shares issued and outstanding
in 1996; and 75,000,000 shares authorized, 32,677,500
shares issued in 1997)................................ 275 327
Additional paid-in capital............................. 11,877 84,185
Retained earnings...................................... 17,656 5,338
Treasury stock, at cost-no shares in 1996 and 3,162,500
shares in 1997........................................ -- (32)
-------- --------
Total stockholders' equity........................... 29,808 89,818
-------- --------
Total liabilities and stockholders' equity......... $158,088 $196,126
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------- -------------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
------------ ------------ -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Software license
fees................. $ 52,061 $ 52,163 $ 7,341 $ 56,796
Maintenance fees...... 65,307 69,702 17,352 55,337
Professional services
fees................. 35,194 34,975 9,948 34,450
------------ ------------ ----------- ------------
Total revenues...... 152,562 156,840 34,641 146,583
------------ ------------ ----------- ------------
Cost of revenues:
Software license...... 15,244 14,120 2,098 17,811
Maintenance........... 23,488 25,885 6,205 22,559
Professional
services............. 32,591 32,966 9,211 28,356
------------ ------------ ----------- ------------
Total cost of
revenues........... 71,323 72,971 17,514 68,726
------------ ------------ ----------- ------------
Gross profit............ 81,239 83,869 17,127 77,857
------------ ------------ ----------- ------------
Operating expenses:
Software product
development.......... 900 1,372 -- 1,093
Sales and marketing... 52,512 48,677 7,317 31,003
Administrative and
general.............. 24,639 28,539 8,500 27,258
Write-off of acquired
in-process research
and development
costs................ -- -- -- 6,051
------------ ------------ ----------- ------------
Total operating
expenses........... 78,051 78,588 15,817 65,405
------------ ------------ ----------- ------------
Income from operations.. 3,188 5,281 1,310 12,452
Other income and ex-
pense, net............. 2,449 5,230 978 1,017
------------ ------------ ----------- ------------
Income before income
taxes.................. 5,637 10,511 2,288 13,469
Income tax provision.... 2,311 4,302 915 8,131
------------ ------------ ----------- ------------
Net income.............. $ 3,326 $ 6,209 $ 1,373 $ 5,338
============ ============ =========== ============
Dividends............... $ 1,700 $ 9,000 $ -- $ --
============ ============ =========== ============
Net income per common
share.................. $ 0.12 $ 0.23 $ 0.06 $ 0.21
============ ============ =========== ============
Net income per common
share-assuming
dilution............... $ 0.11 $ 0.21 $ 0.05 $ 0.20
============ ============ =========== ============
Shares used in computing
net income per common
share:
Net income per common
share................ 27,500 27,500 24,338 25,119
Net income per common
share-assuming
dilution............. 29,056 29,056 25,894 26,685
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$0.01 PAR VALUE ADDITIONAL TOTAL
---------------- PAID-IN- RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- ------- ---------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Predecessor:
Balances at December
31, 1994............. 27,500 $ 275 $11,877 $18,821 $-- $30,973
Net income............ -- -- -- 3,326 -- 3,326
Cash dividends ($0.06
per share)........... -- -- -- (1,700) -- (1,700)
-------- ------ ------- ------- ---- -------
Balances at December
31, 1995............. 27,500 275 11,877 20,447 -- 32,599
Net income............ -- -- -- 6,209 -- 6,209
Cash dividends ($0.33
per share)........... -- -- -- (9,000) -- (9,000)
-------- ------ ------- ------- ---- -------
Balances at December
31, 1996............. 27,500 275 11,877 17,656 -- 29,808
Net income............ -- -- -- 1,373 -- 1,373
-------- ------ ------- ------- ---- -------
Balances at March 31,
1997................. 27,500 $ 275 $11,877 $19,029 $-- $31,181
======== ====== ======= ======= ==== =======
- -------------------------------------------------------------------------------------
Successor:
Initial
capitalization....... 27,500 $ 275 $37,108 $ -- $(32) $37,351
Compensation expense
on options granted... -- -- 323 -- -- 323
Net proceeds from
initial public
offering............. 5,178 52 46,754 -- -- 46,806
Net income............ -- -- -- 5,338 -- 5,338
-------- ------ ------- ------- ---- -------
Balances at December
31, 1997............. 32,678 $ 327 $84,185 $ 5,338 $(32) $89,818
======== ====== ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- -------------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 3,326 $ 6,209 $ 1,373 $ 5,338
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 3,921 3,660 941 6,205
Loss (gain) on sales of property and equipment...................... 67 156 -- (5)
Deferred income taxes............................................... (408) (1,242) -- (4,184)
Deferred gain....................................................... -- (140) (36) --
Net proceeds from sales of accounts receivable...................... 28,852 28,448 -- 24,314
Write-off of acquired in-process research and development costs..... -- -- -- 6,051
Write-off of short-term investment.................................. -- -- -- 1,529
Compensation expense on options granted............................. -- -- -- 323
Change in:
Accounts receivable, excluding net proceeds from sales.............. (47,331) (28,674) 10,996 (43,074)
Prepaid expenses.................................................... 348 (1,698) (3,894) 4,313
Other current assets................................................ 225 (1,870) 3,083 (2,988)
Accounts payable.................................................... (817) 3,472 673 779
Accrued payroll and employee benefits............................... 3,181 (2,194) (3,632) 2,059
Payable to SAG...................................................... 8,495 16,185 6,265 (1,336)
Other current liabilities........................................... 646 1,571 (927) (558)
Income taxes payable................................................ 1,678 1,285 (1,711) (399)
Deferred revenues, net.............................................. 27,435 12,285 (2,705) 4,476
-------- -------- ------- --------
Net cash provided by operating activities......................... 29,618 37,453 10,426 2,843
-------- -------- ------- --------
Cash flows from investing activities:
Additions to property, equipment and leasehold improvements......... (1,839) (3,740) (208) (4,084)
Proceeds from sales of property and equipment....................... 200 9,044 -- 2
Notes receivable, SAG............................................... (20,000) (10,000) -- --
Purchase of Cooperation Agreement................................... -- -- -- (22,612)
Change in other assets, net......................................... (2,137) 443 -- --
Acquisition, net of cash received................................... -- -- -- (6,325)
-------- -------- ------- --------
Net cash used in investing activities............................. (23,776) (4,253) (208) (33,019)
-------- -------- ------- --------
Cash flows from financing activities:
Payment of long-term obligations.................................... (3,124) -- -- --
Dividends paid...................................................... (1,700) (9,000) -- --
Net proceeds from issuance of common stock.......................... -- -- -- 46,806
Repurchase of common stock.......................................... -- -- -- (33,919)
Issuance of common stock............................................ -- -- -- 31,727
-------- -------- ------- --------
Net cash provided by (used in) financing activities............... (4,824) (9,000) -- 44,614
-------- -------- ------- --------
Net increase in cash and cash equivalents............................ 1,018 24,200 10,218 14,438
Cash and cash equivalents, beginning................................. 555 1,573 25,773 35,991
-------- -------- ------- --------
Cash and cash equivalents, ending.................................... $ 1,573 $ 25,773 $35,991 $ 50,429
======== ======== ======= ========
Non-cash investing and financing activity:
Deferred gain on sale leaseback of customer support facility........ $ -- $ 2,830 $ -- $ --
======== ======== ======= ========
Supplemental disclosures:
Interest paid....................................................... $ 350 $ 103 $ -- $ 14
======== ======== ======= ========
Income taxes paid, net of refunds................................... $ 387 $ 3,481 $ 3,026 $ 7,661
- --------------------------------------------------
======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Principles of Consolidation
Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). As is more fully described in Note 2, on March 31, 1997, the
Company consummated a recapitalization agreement under which the Company
repurchased from SAG 24,750,000 shares of common stock, and certain senior
management of the Company and Thayer Equity Investors III, L.P. ("Thayer")
acquired approximately 89% of the then outstanding common stock of the Company
(the "Recapitalization").
The consolidated financial statements include the accounts of Software AG
Systems, Inc. and its wholly owned subsidiaries. All inter-company balances
and transactions between the Company and its wholly owned subsidiaries have
been eliminated.
Description of Operations
The Company provides software products and professional services utilized by
organizations to build and enhance enterprise-level applications. The
Company's products are used for mission-critical applications that require
reliability, scalability and security, such as customer billing systems,
financial accounting systems and inventory management. The Company's business
is focused on database management and applications development products. The
Company markets and sells its software products and services, as well as
third-party products, through direct and indirect channels in North America,
South America, Japan and Israel.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of the
American Institute of Certified Public Accountants Statement of Position No.
91-1, Software Revenue Recognition.
Product license revenues are recognized when there is an executed license
agreement, the software and authorization code have been delivered,
collectibility from the customer is probable and there are no significant
remaining obligations to the customer.
Maintenance revenues, which include unspecified when-and-if deliverable
software upgrades, user documentation and technical support for software
products, are deferred and recognized on a straight-line basis over the term
of the maintenance agreement, generally one year.
Customer training revenues and revenues from time and material type
professional consulting and custom application contracts are recognized as the
services are provided and the work is performed. Revenues from long-term fixed
price professional consulting and custom application contracts are accounted
for under the percentage of completion method. When estimates of costs, on
long-term fixed price contracts, indicate a loss, such a loss is provided for
currently.
Sales of enterprise license agreements, which generally bundle a combination
of products, technical services and professional consulting services, are
accounted for according to their component parts using the criteria described
above.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three
months or less at time of purchase to be cash equivalents. Cash equivalents
consist of commercial paper and overnight repurchase agreements.
F-8
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are recorded at cost.
Depreciation of property and equipment is provided on a straight-line basis
over the estimated useful asset lives, generally 31.5 years for property and
three to five years for equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the respective lease term or estimated
useful asset lives.
Intangible Assets
Goodwill, which represents the excess of purchase price over fair market
value of net assets acquired, and other intangible assets are amortized on a
straight-line basis over the expected periods to be benefited, generally 10
years. The Company assesses the recoverability of intangible assets by
determining whether the amortization of the assets over the remaining lives
can be recovered through undiscounted future operating cash flows. The amount
of impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of intangible
assets will be impacted if estimated future operating cash flows are not
achieved.
Income Taxes
The Company uses the asset and liability method to account for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the future tax consequences attributable to future years for differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
Foreign Currency Translation
The local currencies of the Company's foreign subsidiaries are the
functional currencies. The assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to stockholders'
equity. Revenue and expense accounts of these operations are translated at
average exchange rates prevailing during the year. Transaction gains and
losses relate to foreign currency denominated receivables recorded in the
financial statements of the Company's U.S. operations, and are reflected in
income. There were no material foreign currency adjustments.
F-9
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income per Common Share
The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share and has amended all previous earnings per share
calculations. Basic earnings per share is based on income available to common
stockholders divided by the weighted average number of common shares
outstanding. Diluted earnings per share is based on income available to common
stockholders divided by the sum of the weighted average number of common
shares outstanding and all potential common shares which are dilutive. The
following information is a reconciliation of the amounts used in these
calculations:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- -------------
YEAR YEAR THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net income............. $3,326 $6,209 $1,373 $5,338
====== ====== ====== ======
Denominator:
Basic:
Weighted average
shares outstanding... 27,500 27,500 24,338 25,119
Effect of dilutive
securities:
Stock options......... 1,556 1,556 1,556 1,566
------ ------ ------ ------
Diluted:
Weighted average
shares outstanding--
assuming dilution.... 29,056 29,056 25,894 26,685
====== ====== ====== ======
EPS:
Net income per common
share................. $ 0.12 $ 0.23 $ 0.06 $ 0.21
Net income per common
share--assuming
dilution.............. 0.11 0.21 0.05 0.20
</TABLE>
Stock Option Plan
The Company accounts for issuance of stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"). SFAS No. 123 permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of Accounting Principles Board Opinion No.
25 ("APB No. 25") and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1997 and future
years as if the fair-value based method defined in SFAS No. 123 had been
applied. Under APB No. 25, compensation expense would be recorded on the date
of the grant only if the current market price of the underlying stock exceeded
the exercise price. The Company has elected to continue to apply the
provisions of APB No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
Financial Statement Presentation
The historical financial information set forth in these consolidated
financial statements for the periods ended, or as of the dates prior to March
31, 1997 reflect the results of operations of the Company prior to the
Recapitalization when the Company was a wholly owned subsidiary of SAG and is
captioned as "Predecessor". The historical financial information subsequent to
March 31, 1997 reflects the consolidated financial position and results of
operations subsequent to the Recapitalization and is captioned as "Successor".
F-10
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform to the
fiscal 1997 presentation.
(2) RECAPITALIZATION OF THE COMPANY
On March 31, 1997, the Company consummated the Recapitalization under which
the Company repurchased from its former parent, SAG, 24,750,000 shares of
common stock and sold 21,450,000 shares of common stock to Thayer and certain
of the Company's senior managers. As a result of this change in control, the
acquisition by Thayer and such managers was accounted for as a purchase
business combination, and as such the fair value of the Company's assets and
liabilities was recorded as of April 1, 1997.
Prior to the consummation of the Recapitalization, the Company entered into
a perpetual (unless otherwise terminated by the written agreement of the
parties) cooperation agreement ("Cooperation Agreement") with SAG that
terminated and superseded the license agreement dated January 1, 1995. As
consideration for the Cooperation Agreement, the Company paid SAG
approximately $22,600,000. Under the Cooperation Agreement, each of the
Company and SAG are required to pay the other royalties of 24% of net revenues
from sales of licenses of, and technical services on, each other's products
for the initial 20 years of the perpetual term of the agreement. For calendar
years 1997 through 2000, the Company is required to pay SAG minimum annual
royalties of $21,000,000, provided that SAG's worldwide product and technical
services revenues for each of those years are at least equal to SAG's 1996
worldwide revenues. In the event of a decrease in SAG's worldwide revenues,
the minimum annual royalty requirement will be reduced proportionately.
Pursuant to the Recapitalization, Thayer and certain of the Company's senior
managers acquired approximately an 89% interest in the Company for
approximately $31,500,000. The determination of fair value allocated to the
identifiable assets and liabilities of the Company has been made by management
based on the nature of the assets and liabilities acquired, and general
economic factors. Based on this allocation, the fair value of the Company's
Cooperation Agreement has been recorded at $23,500,000, based on an
independent appraisal. The amortization period for the Cooperation Agreement
is ten years. The fair value of the Company's remaining assets and liabilities
has been presumed to be equal to the book value as of the date of the
acquisition. Based on allocation of the purchase price to the net assets and
liabilities, an excess of purchase price over net assets acquired (goodwill)
of $6,402,000 was recorded. Such goodwill is being amortized on a straight-
line basis over ten years. At December 31, 1997, accumulated amortization on
the Cooperation Agreement and the goodwill was $1,763,000 and $480,000,
respectively.
(3) INITIAL PUBLIC OFFERING
In September 1997, the Company's Board of Directors authorized the Company
to file a Registration Statement on Form S-1 with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. The Company's Board of Directors also approved a 275-for-1 stock split
which became effective on November 17, 1997. Common share and per share data
in these consolidated financial statements have been retroactively adjusted to
reflect such stock split. Additionally, the Company's Certificate of
Incorporation was amended and restated to authorize an additional 20,000,000
shares of $0.01 par value common stock and an additional 11,250,000 shares of
$0.01 par value preferred stock, for a total of 75,000,000 authorized
F-11
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shares of common stock and 25,000,000 authorized shares of $0.01 par value
preferred stock. The Company had previously authorized 13,750,000 shares of
$0.01 par value preferred stock on March 14, 1997.
On November 21, 1997, 7,700,000 shares of the Company's common stock was
sold to the public at $10 per share, of which 3,100,000 shares were sold by
certain stockholders of the Company, and 4,600,000 shares were sold by the
Company ("IPO"). On December 17, 1997, the Company and certain stockholders
combined sold 1,155,000 shares of common stock at $10 per share to cover the
over-allotment option exercised by the underwriters. The aggregate proceeds,
net of underwriting discounts and commissions, to the Company and certain
stockholders from these transactions were $48,151,000 and $34,201,000,
respectively.
(4) ACQUISITION
On September 30, 1997, the Company acquired 100% of the issued and
outstanding shares of the common stock of R.D. Nickel and Associates, Inc.
("R.D. Nickel"). R.D. Nickel is a software company that has a family of
application development products and that has been the exclusive distributor
of SAG's products in Canada since 1973. The transaction was accounted for
using the purchase method of accounting for a business combination. The
aggregate purchase price of Cdn$14,000,000 (US$10,130,000) was funded through
a cash payment of Cdn$7,000,000 (US$5,065,000) and a note payable of
Cdn$7,000,000 (US$5,065,000). The note payable was paid in November 1997 with
the proceeds from the IPO.
In connection with the transaction, the Company recorded a $6,051,000 non-
recurring charge against earnings for in-process research and development
costs. The remaining excess purchase price of $4,960,000 represents goodwill.
The related amortization period for the goodwill is ten years.
As of October 1, 1997, the operating results of R.D. Nickel have been
consolidated with the Company's operating results.
The R.D. Nickel acquisition was not determined to be significant to the
operations or financial position of the Company; accordingly, the pro forma
financial information has not been presented.
(5) CONCENTRATIONS OF CREDIT RISK AND FAIR VALUES OF FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
include accounts receivable, cash and cash equivalents. Management believes
that credit risk related to the Company's accounts receivable is limited due
to a large number of customers in differing industries and geographic areas.
The Company does not require collateral for accounts receivable. Historically,
the Company has not experienced significant losses on accounts receivable
except in isolated situations. The Company maintains depository relationships
with several banks. At times, the Company's cash deposits may exceed federally
insured limits. Periodically, the Company invests excess cash in low risk,
highly liquid repurchase agreements and other instruments through high credit
quality financial institutions. The Company has not experienced any losses in
its depository accounts or short-term investments and management believes that
the Company is not exposed to any significant credit risks.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, payable
to SAG, and amounts included in other current assets and current liabilities
that meet the definition of a financial instrument, approximate fair value
because of the short-term nature of these amounts.
The carrying amount of installment accounts receivable, net of related
deferred revenues approximates the fair value.
F-12
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) ACCOUNTS RECEIVABLE
Total current and non-current accounts receivable (including installment)
consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Domestic............................................... $73,924 $83,659
International.......................................... 9,381 13,448
Less: allowance for doubtful accounts.................. (4,980) (9,301)
------- -------
$78,325 $87,806
======= =======
</TABLE>
Installment Accounts Receivable
Installment accounts receivable represent unbilled receivables from
enterprise license agreements and other long-term and short-term contracts
with deferred invoicing terms.
Installment accounts receivable include:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Gross installment accounts receivable.................. $27,258 $35,172
Less: unearned interest................................ 1,003 1,806
------- -------
26,255 33,366
Less: current portion.................................. 15,300 24,434
------- -------
$10,955 $ 8,932
======= =======
</TABLE>
The effective interest rate on the installment accounts receivable, net of
related deferred revenues, at December 31, 1996 and 1997 was approximately 9%.
At December 31, 1997, installment accounts receivable are scheduled to be
invoiced as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------------
(IN THOUSANDS)
<S> <C>
1998.......................................................... $25,894
1999.......................................................... 6,535
2000.......................................................... 1,558
2001.......................................................... 1,185
-------
$35,172
=======
</TABLE>
In 1996 and 1997, the Company sold installment accounts receivable relating
to certain enterprise license agreements and other long-term contracts to
unrelated financing companies, receiving net proceeds of $28,448,000 and
$24,314,000, respectively. The installment accounts receivable sold include
those relating to product and license fees, technical services, and
professional consulting services. Under the terms of the agreements with the
financing companies, the Company continues to service the receivables sold,
including invoicing and collection, and makes payments to the financing
companies under pre-determined amortization schedules based on the scheduled
invoicing dates of the receivables sold. The amortization schedules provide
rates of return to the financing companies ranging from 8.5% to 8.9%.
F-13
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The agreements allow for substitution of contracts for early terminations
and require the Company to repurchase contracts that cease to meet eligibility
requirements, such as those contracts that become 90 days past due. At
December 31, 1996 and 1997, the Company remained contingently liable under the
recourse provisions for $44,801,000 and $47,927,000, respectively. The
Company's allowance for doubtful accounts is maintained at a level that
management believes is sufficient to cover potential losses under the recourse
provisions on receivables sold.
Under the terms of the agreements, the Company is required to maintain
specified amounts of net worth and cash availability, and a debt to equity
ratio that does not exceed a specified amount. If the Company fails to
maintain these specified amounts, the financing companies may assume the
servicing rights on receivables sold.
Unbilled Services
Unbilled services relate primarily to long-term professional consulting
services and custom application contracts accounted for using the percentage
of completion method. Billings on these contracts generally are tied to
achieving specific milestones.
Unbilled services include:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Unbilled work in process............................... $6,775 $ 9,524
Retainage.............................................. 1,474 1,761
------ -------
8,249 11,285
Less: advance billings and prepayments................. 2,220 901
------ -------
$6,029 $10,384
====== =======
</TABLE>
(7) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment..................................... $18,138 $22,524
Leasehold improvements................................. 9,021 9,188
Furniture and other equipment.......................... 7,713 8,162
------- -------
34,872 39,874
Less: accumulated depreciation and amortization........ 25,949 29,797
------- -------
$ 8,923 $10,077
======= =======
</TABLE>
Depreciation and amortization for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, was $3,733,000, $3,473,000,
$896,000 and $2,952,000, respectively.
(8) SALE OF CUSTOMER SUPPORT FACILITY
In 1996, the Company recorded a sale-leaseback transaction for its customer
support facility. In connection with the sale, the Company realized a gain of
$2,830,000, which was being recognized on a straight-line basis over the term
of the related operating lease. In connection with the Recapitalization of the
Company (Note 2) in March 1997, no value was recorded in the financial
statements for this deferred gain.
F-14
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) TRANSACTIONS WITH RELATED PARTY
Royalties
In 1994, the Company licensed and serviced SAG products under a pre-existing
license agreement pursuant to which the Company was required to make payments
to SAG based on a specified percentage of the net sales amount for licenses
of, and technical services on, SAG's products. Effective January 1, 1995, the
Company and SAG entered into a new license agreement whereby the Company was
required to pay royalties of 24% of such net sales amounts. For 1995, 1996 and
for the three months ended March 31, 1997, royalty expense related to SAG's
products was $23,887,000, $26,058,000 and $5,683,000, respectively.
Under the license agreement, SAG pays royalties to the Company on sales of
the Company's products under the same terms. For 1995, 1996 and for the three
months ended March 31, 1997, royalty revenues related to the Company's
products were $295,000, $294,000 and $339,000, respectively.
In connection with the Recapitalization (Note 2), the Company entered into
the Cooperation Agreement under which the Company paid $23,595,000 of
royalties to SAG and SAG paid royalties of $300,000 to the Company for the
nine months ended December 31, 1997.
Cost Reimbursements
As an accommodation to SAG, the Company houses certain of SAG's product
development and quality assurance personnel. SAG reimburses the Company for
the costs incurred related to such product development and quality assurance
activities. All intellectual property resulting from this work is the sole
property of SAG. The reimbursements from SAG are netted against costs incurred
and included in software product development costs in the statement of
operations. Reimbursements for 1995, 1996, for the three months ended March
31, 1997 and for the nine months ended December 31, 1997 were $8,767,000,
$15,931,000, $3,416,000 and $7,406,000, respectively.
Notes Receivable/Payable
In 1995, the Company loaned $20,000,000 to SAG, which originally was
scheduled to be repaid in 2000. In 1996, the Company loaned an additional
$10,000,000 to SAG, which originally was scheduled to be repaid in 2001.
Interest at 6.5% and 7%, respectively, was payable quarterly on the 1995 and
1996 loans. In March 1997, the Company and SAG agreed to offset the entire
balance of the notes receivable from SAG as of December 31, 1996 against the
payable to SAG. Interest earned for 1995, 1996 and for the three months ended
March 31, 1997 was $280,000, $1,590,000 and $333,000, respectively.
The payable to SAG of $33,317,000 and $10,050,000 at December 31, 1996 and
1997, respectively, includes royalties due under the previous license
agreement and under the Cooperation Agreement on sales of both product
licenses and technical services, as well as net amounts due on other
transactions between the Company and SAG. These amounts are non-interest
bearing.
In 1995, SAG loaned $2,500,000 to the Company, which was repaid during the
year. Interest expense on this note was $119,000, computed at 8%.
Dividends
In 1995 and 1996, the Company paid dividends of $1,700,000 and $9,000,000,
respectively, to SAG, which at the time owned 100% of the outstanding common
stock of the Company. No dividends were paid during 1997 to SAG, and there are
no plans for future dividend payments.
F-15
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES
Income tax expense consisted of:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current expense:
Federal............................................................................ $1,744 $ 4,167 $ 1,196 $ 6,226
State.............................................................................. 274 586 258 1,551
Foreign............................................................................ 701 791 604 3,395
------ ------- ------- -------
2,719 5,544 2,058 11,172
------ ------- ------- -------
Deferred benefit:
Federal............................................................................ (265) (1,136) (959) (2,560)
State.............................................................................. (143) (106) (184) (481)
------ ------- ------- -------
(408) (1,242) (1,143) (3,041)
------ ------- ------- -------
$2,311 $ 4,302 $ 915 $ 8,131
====== ======= ======= =======
</TABLE>
Income tax expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, differed from the amounts computed by
applying the U.S. federal income tax rate of 34%, 34%, 35% and 35%,
respectively, to pretax income as a result of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Computed "expected" tax expense...................................................... $1,917 $3,573 $801 $4,714
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit......................................... 86 314 48 696
Expenses, principally meals and entertainment, not deductible...................... 277 224 6 209
Amortization and write-off of intangibles.......................................... -- -- 49 2,439
Other, net......................................................................... 31 191 11 73
------ ------ ---- ------
$2,311 $4,302 $915 $8,131
====== ====== ==== ======
</TABLE>
F-16
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and liabilities consist of:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
DEC. 31, DEC. 31,
1996 1997
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets arising from deductible temporary
differences:
Accrued compensation costs and other expenses...... $1,533 $2,679
Allowance for doubtful accounts.................... 1,879 3,617
Depreciation and amortization...................... 917 1,473
Deferred gain--installment method.................. 1,022 1,000
Investments........................................ -- 642
------ ------
5,351 9,411
Deferred tax liabilities arising from taxable
temporary differences:
Leases of product licenses......................... 470 346
------ ------
Net deferred income taxes............................ 4,881 9,065
Less: current portion, deferred tax assets........... 3,412 6,217
------ ------
Non-current portion, deferred tax assets............. $1,469 $2,848
====== ======
</TABLE>
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Based upon the
level of historical taxable income and projections for future taxable income
over the periods for which the deferred tax assets are deductible, management
believes that it is more likely than not that the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
(11) RETIREMENT PLANS
The Company has a retirement plan covering substantially all of its
employees. This plan meets the requirements of Section 401(k) of the Internal
Revenue Code. The Company matches employee contributions and may make
additional contributions based on the Company's profitability. For 1995, 1996,
three months ended March 31, 1997 and nine months ended December 31, 1997, the
Company's matching (and total) contributions were $1,789,000, $1,854,000,
$696,000 and $1,190,000, respectively.
The Company also has entered into deferred compensation agreements with
certain key executives. Under these agreements, the executives are credited
with annual pre-determined amounts and amounts based on bonuses received, and
earn interest on the deferred amounts. Total deferrals, which are included in
accrued payroll and employee benefits, were $1,504,000 and $1,068,000 at
December 31, 1996 and 1997, respectively, net of loans of $558,000 and
$1,164,000, respectively. The expense for these agreements was $653,000,
$1,218,000, $150,000 and $160,000 for 1995, 1996, three months ended March 31,
1997 and nine months ended December 31, 1997, respectively. To assist in the
funding of these agreements the Company has purchased corporate-owned life
insurance on certain of these executives. The cash surrender value of these
policies, which is included in other assets, was $668,000 and $764,000 at
December 31, 1996 and 1997, respectively.
F-17
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) STOCK OPTION PLAN
The Company adopted the Software AG Systems, Inc. 1997 Stock Option Plan
(the "Option Plan") on April 29, 1997. The Option Plan permits a maximum of
6,875,000 shares of common stock to be issued pursuant to grants of stock
options. Unless sooner terminated by the Company's Board of Directors, the
Option Plan will terminate on April 11, 2007. Pursuant to the Option Plan, the
exercise price per share shall not be less than the fair market value of each
share at the date of grant. All options issued generally have vesting periods
of zero to four years from the grant date and expire after the seventh
anniversary from the date of grant. At December 31, 1997, 1,831,775 shares
were available for grant under the Option Plan.
Following is a summary of activity under the Option Plan for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
PRICE PER SHARE
--------------------
WEIGHTED
SHARES RANGE AVERAGE
--------- ----------- --------
<S> <C> <C> <C>
Granted....................................... 5,069,900 $1.47-12.00 $4.66
Exercised..................................... -- -- --
Terminated/Forfeited.......................... 26,675 1.47-9.60 2.90
--------- ----------- -----
Balance, December 31, 1997.................... 5,043,225 $1.47-12.00 $5.02
========= =========== =====
</TABLE>
The following table summarizes information about the Option Plan at December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
3,142,975 6.26 $ 1.47 1,100 $1.47
744,975 6.61 9.60 592,625 9.60
152,900 6.85 10.00 -- --
1,002,375 6.73 12.00 -- --
--------- ---- ------ ------- -----
5,043,225 6.42 $ 5.02 593,725 $9.58
========= ==== ====== ======= =====
</TABLE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") was issued. SFAS
No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 encourages companies to adopt the fair value method for compensation
expenses recognition related to employee stock options. Existing accounting
requirements of Accounting Principles Board Opinion No. 25 ("APB No. 25") use
the intrinsic value method in determining compensation expense which
represents the excess of the market price of the stock over the exercise price
on the measurement date. The Company has elected to remain under APB No. 25
rules for stock options, under which no compensation cost has been recognized,
and is required to provide pro forma disclosure of the net income and earnings
per share that would have been had the Company adopted the new fair value
method for recognition purposes. The following information is presented as if
the Company had adopted SFAS No. 123 and restated its results for the nine
months ended December 31, 1997 (in thousands, except per share data):
<TABLE>
<S> <C>
Net income--as reported.............................................. $5,338
Net income--pro forma................................................ $4,741
Earnings per share--as reported...................................... $ 0.21
Earnings per share (assuming dilution)--as reported.................. $ 0.20
Earnings per share--pro forma........................................ $ 0.19
Earnings per share (assuming dilution)--pro forma.................... $ 0.18
</TABLE>
F-18
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the above information, the fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1997: dividend yield of zero percent;
risk-free interest rate of 6%; expected volatility of 40%; expected lives
ranging from two to six years; and a forfeitures rate of 2.9%. The weighted
average fair value of options granted during the nine months ended December
31, 1997 was $1.97 per option.
The full impact of calculating cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options vesting period of four years.
(13) OPERATING LEASE COMMITMENTS
The Company leases office space and equipment under operating lease
agreements that expire at various dates through 2015.
Future minimum rent payments under operating leases, net of aggregate rents
of $5,116,000 expected to be received from subleasing of a portion of the
customer support facility and another facility, at December 31, 1997, are:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, FACILITIES EQUIPMENT TOTAL
------------------------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1998......................................... $ 4,901 $2,002 $ 6,903
1999......................................... 5,596 1,592 7,188
2000......................................... 5,585 527 6,112
2001......................................... 5,311 41 5,352
2002......................................... 4,776 11 4,787
Thereafter................................... 23,111 -- 23,111
------- ------ -------
$49,280 $4,173 $53,453
======= ====== =======
</TABLE>
Facility rent expense for 1995, 1996, three months ended March 31, 1997 and
nine months ended December 31, 1997, was $6,105,000, $7,002,000 $1,722,000 and
$5,179,000, respectively. Rent expense includes the current year effect of
determinable scheduled rent increases and initial rent abatement periods
contained in certain of the Company's facility lease agreements.
Equipment lease expense for 1995, 1996, three months ended March 31, 1997
and nine months ended December 31, 1997, was $l,532,000, $1,678,000 $339,000
and $1,018,000, respectively.
The Company's operating lease agreement for its customer support facility
requires the Company to maintain minimum amounts of net worth and retained
earnings. If the minimum amounts are not maintained, the Company will be
required to post a $500,000 irrevocable letter of credit for each $2,000,000
shortfall, to be applied by the lessor in the event of default under the
lease.
F-19
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) GEOGRAPHIC INFORMATION
Net revenue, operating income, and identifiable assets by geographic area
were as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue
U.S. operations............................................................... $130,997 $129,879 $ 30,424 $116,378
Canadian operations........................................................... -- -- -- 3,861
Mexican operations............................................................ -- -- -- 4,507
Other operations.............................................................. 21,565 26,961 4,217 23,329
Intercompany elimination...................................................... -- -- -- (1,492)
-------- -------- -------- --------
Total revenue............................................................... $152,562 $156,840 $ 34,641 $146,583
======== ======== ======== ========
Income (loss) from operations
U.S. operations............................................................... $ 3,188 $ 5,281 $ 1,310 $ 18,732
Canadian operations........................................................... -- -- -- (5,129)
Mexican operations............................................................ -- -- -- (1,151)
Other operations.............................................................. -- -- -- --
-------- -------- -------- --------
Total operating income...................................................... $ 3,188 $ 5,281 $ 1,310 $ 12,452
======== ======== ======== ========
Identifiable assets
U.S. operations............................................................... $125,612 $158,088 $127,749 $187,892
Canadian operations........................................................... -- -- -- 9,143
Mexican operations............................................................ -- -- -- 1,538
Other operations.............................................................. -- -- -- --
Intercompany elimination...................................................... -- -- -- (2,447)
-------- -------- -------- --------
Total identifiable assets................................................... $125,612 $158,088 $127,749 $196,126
======== ======== ======== ========
</TABLE>
Canadian operations include one subsidiary, R.D. Nickel, which was acquired
in September 1997. Mexican operations include one subsidiary located in
Mexico. The Company's Mexican operations commenced in 1996 and operated as a
branch office until it became a wholly owned subsidiary in May 1997. Other
operations include royalty revenue from international distributors.
Royalty revenues from international distributors are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------- ---------
THREE NINE
YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, MAR. 31, DEC. 31,
1995 1996 1997 1997
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Japan................................................................................ $ 8,607 $ 9,207 $ 971 $10,481
Brazil............................................................................... 5,931 7,000 1,500 7,500
Canada............................................................................... 3,981 4,640 805 2,026
Other................................................................................ 3,046 6,114 941 3,322
------- ------- ------ -------
Total royalty revenues from international distributors............................. $21,565 $26,961 $4,217 $23,329
======= ======= ====== =======
</TABLE>
F-20
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Royalty revenues from international distributors included in software
license fees and maintenance fees on the consolidated statements of operations
were approximately $13,316,000 and $8,249,000, respectively, in 1995,
$16,982,000 and $9,979,000, respectively, in 1996, $2,331,000 and $1,886,000,
respectively, for the three months ended March 31, 1997, and $16,105,000 and
$7,224,000, respectively, for the nine months ended December 31, 1997.
Royalties from Canada includes royalties received from R.D. Nickel prior to
the acquisition in September 1997.
Sales and transfers between geographic areas are accounted for at prices
which the Company believes are arm's length, and in accordance with the rules
and regulations of the respective governing tax authorities.
(15) OTHER INCOME AND EXPENSE, NET
Other income and expense, net, on the consolidated statements of operations
primarily includes interest income of $1,406,000 in 1995; interest income of
$2,914,000 and gain on sale of other assets of $1,000,000 in 1996; interest
income of $779,000 for the three months ended March 31, 1997; and interest
income of $728,000 for the nine months ended December 31, 1997.
(16) CONTINGENCIES
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, primarily relating to product and contract
performance issues, and employee termination matters. While it is not feasible
to predict or determine the final outcome of these proceedings, management
does not believe that they will have a material adverse effect on the
Company's financial position or results of operations.
(17) NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for annual and interim periods
beginning after December 15, 1997. This statement established standards for
the reporting and display of comprehensive income and its components in the
financial statements. Upon its adoption the Company will be required to
reclassify previously reported annual and interim financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which is effective for
annual periods ending after December 15, 1997. SFAS No. 131 established
standards for the way public business enterprises are to report information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2")
which supersedes statement of Position 91-1, "Software Revenue Recognition".
SOP 97-2 focuses on when and in what amounts revenue should be recognized for
licensing, selling, leasing or otherwise marketing computer software, and is
effective for transactions entered into in fiscal years beginning after
December 15, 1997.
The Company does not expect that the adoption of these new accounting
standards will have a material effect on the Company's financial position or
results of operation.
F-21
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized financial data by quarters is as follows:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------
THREE MONTHS ENDED
--------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue......................... $ 32,286 $ 37,109 $ 41,126 $ 46,319
Gross profit.................... $ 15,434 $ 20,151 $ 21,276 $ 27,008
Net income (loss)............... $ (212) $ (623) $ 2,745 $ 4,299
Net income (loss) per share..... $ (0.01) $ (0.02) $ 0.10 $ 0.16
Net income (loss) per share-
assuming dilution.............. $ (0.01) $ (0.02) $ 0.09 $ 0.15
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------------------------
THREE MONTHS ENDED
---------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
----------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue............................ $34,641 $42,947 $46,729 $56,907
Gross profit....................... $17,127 $22,845 $23,748 $31,264
Net income (loss).................. $ 1,373 $ 2,151 $(3,227) $ 6,414
Net income (loss) per share........ $ 0.06 $ 0.09 $ (0.13) $ 0.24
Net income (loss) per share-
assuming dilution................. $ 0.05 $ 0.08 $ (0.13) $ 0.23
</TABLE>
(19) SUBSEQUENT EVENTS
On February 19, 1998, the Company's Board of Directors approved a qualified
employee stock purchase plan ("ESPP") and authorized the issuance of 1,500,000
shares of common stock for purchase pursuant to the ESPP. The ESPP is to
commence on June 1, 1998. Under the terms of the ESPP, employees may
contribute, through payroll deduction, up to 15% of eligible compensation to
purchase stock with the limitation of $25,000 annually in fair market value of
the stock. Employees may elect to withdraw from the ESPP at any time during
the two six months offering periods which are December to May and June to
November and have their contribution for the period returned to them. Also,
employees may elect to change the rate of contribution only once during the
offering periods. The price at which employees may purchase shares is 85% of
the lower of the fair market value of the stock at the beginning or end of the
six months offering period. The ESPP is qualified under Section 423 of the
Internal Revenue Code of 1986, as amended. The ESPP is subject to stockholder
approval which will be voted at the annual stockholders' meeting to be held on
May 18, 1998.
F-22
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
--------------
(IN THOUSANDS)
<S> <C>
Assets
Current:
Cash and cash equivalents.................................... $ 50,276
Accounts receivable:
Invoiced and currently due................................. 27,816
Advanced billings on maintenance........................... 7,281
Unbilled services.......................................... 13,894
Installment................................................ 33,574
Other...................................................... 5,466
Less: allowance for doubtful accounts...................... (9,383)
--------
Total accounts receivable................................ 78,648
Current portion of deferred income taxes..................... 6,217
Other current assets......................................... 6,022
--------
Total current assets..................................... 141,163
Cooperation agreement, net of accumulated amortization......... 21,150
Installment accounts receivable, net of current portion........ 12,273
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization..................... 10,415
Deferred income taxes.......................................... 2,848
Goodwill, net of accumulated amortization...................... 10,988
Other assets................................................... 763
--------
Total assets............................................. $199,600
========
Liabilities and Stockholders' Equity
Current:
Accounts payable............................................. $ 8,419
Accrued payroll and employee benefits........................ 7,234
Payable to SAG............................................... 8,591
Income taxes payable......................................... 3,337
Other current liabilities.................................... 5,219
Current portion of deferred revenues, net of deferred
royalties................................................... 42,934
--------
Total current liabilities................................ 75,734
Deferred revenues, net of deferred royalties................... 28,623
--------
Total liabilities........................................ 104,357
Stockholders' equity........................................... 95,243
--------
Total liabilities and stockholders' equity............... $199,600
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-23
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DOLLAR AMOUNTS)
<S> <C> <C>
Revenues:
Software license fees..... $ 7,341 $21,649
Maintenance fees.......... 17,352 19,800
Professional services
fees..................... 9,948 14,414
------- -------
Total revenues.......... 34,641 55,863
------- -------
Cost of revenues:
Software license.......... 2,098 5,670
Maintenance............... 6,205 7,057
Professional services..... 9,211 11,501
------- -------
Total cost of revenues.. 17,514 24,228
------- -------
Gross profit................ 17,127 31,635
------- -------
Operating expenses:
Software product
development.............. -- 755
Sales and marketing....... 7,317 11,873
Administrative and
general.................. 8,500 10,805
------- -------
Total operating
expenses............... 15,817 23,433
------- -------
Income from operations...... 1,310 8,202
Other income and expense,
net........................ 978 906
------- -------
Income before income taxes.. 2,288 9,108
Income tax provision........ 915 3,718
------- -------
Net income.................. $ 1,373 $ 5,390
======= =======
Net income per common
share...................... $ 0.06 $ 0.18
======= =======
Net income per common share-
assuming dilution.......... $ 0.05 $ 0.17
======= =======
Shares used in computing net
income per common share:
Net income per common
share.................... 24,338 29,517
Net income per common
share-assuming dilution.. 25,894 31,491
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-24
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................................................ $ 1,373 $ 5,390
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................................... 941 2,070
Gain on sales of property and equipment.......................................................... -- (22)
Deferred gain.................................................................................... (36) --
Write-off of investment.......................................................................... -- 848
Compensation expense on options granted.......................................................... -- 194
Changes in operating accounts.................................................................... 8,148 (7,044)
------- -------
Net cash provided by operating activities...................................................... 10,426 1,436
------- -------
Cash flows from investing activities:
Additions to property, equipment and leasehold improvements........................................ (208) (1,523)
Proceeds from sales of property and equipment...................................................... -- 22
------- -------
Net cash used in investing activities.......................................................... (208) (1,501)
------- -------
Cash flows from financing activities:
Proceeds from stock options exercised.............................................................. -- 12
Adjustments to expenses relating to initial public offering........................................ -- (100)
------- -------
Net cash used in financing activities.......................................................... -- (88)
------- -------
Net increase (decrease) in cash and cash equivalents................................................. 10,218 (153)
Cash and cash equivalents, beginning................................................................. 25,773 50,429
------- -------
Cash and cash equivalents, ending.................................................................... $35,991 $50,276
- --------------------------------------------------
======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-25
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by management, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 1997 contained elsewhere in this
Prospectus.
In the opinion of management, the accompanying balance sheets and related
statements of operations and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. The results for the
three months ended March 31, 1998 are not necessarily indicative of the
results expected for the full year.
Prior to March 31, 1997, Software AG Systems, Inc. and subsidiaries (the
"Company") was a wholly owned subsidiary of Software AG, a German software
company ("SAG"). On March 31, 1997, the Company consummated a recapitalization
agreement under which the Company repurchased from SAG 24,750,000 shares of
common stock, and certain senior management of the Company and Thayer Equity
Investors III, L.P. ("Thayer") acquired approximately 89% of the then
outstanding common stock of the Company (the "Recapitalization"). The
Company's results of operations for the three months ended March 31, 1997 are
based on operations which occurred prior to the Recapitalization and are not
comparable with the results of operations for the three months ended March 31,
1998.
(2) ACCOUNTING POLICIES
Revenue Recognition
On January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") which superseded Statement of
Position 91-1, "Software Revenue Recognition." SOP 97-2 focuses on when and in
what amounts revenue should be recognized for licensing, selling, leasing, or
otherwise marketing computer software. The adoption of SOP 97-2 did not have a
material impact on the Company's revenue recognition policies.
Software license revenues for an arrangement to deliver software that does
not require significant production, modification or customization of software
is recognized when there is an executed license agreement, the software and
authorization code have been delivered, the fee is fixed or determinable and
collectibility is probable.
Maintenance revenues, which include unspecified when-and-if deliverable
software upgrades, user documentation, and technical support for software
products, are deferred and recognized on a straight-line basis over the term
of the maintenance agreement, generally one year.
Customer training revenues and revenues from time and material type
professional consulting and custom application contracts are recognized as the
services are provided and the work is performed. Revenues from long-term fixed
price professional consulting and custom application contracts are accounted
for under the percentage of completion method. When estimates of costs, on
long-term fixed price contracts, indicate a loss, such a loss is provided for
currently.
Sales of enterprise license agreements, generally bundle a combination of
products, technical services and professional consulting services. In
accordance with SOP 97-2, these elements are unbundled for revenue recognition
purposes, and are accounted for according to their component parts using the
criteria described above.
F-26
<PAGE>
SOFTWARE AG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income per Common Share
The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In
accordance with SFAS No. 128 requirements, the Company presents basic and
diluted earnings per share. Basic earnings per share is based on income
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is based on income
available to common stockholders divided by the sum of the weighted average
number of common shares outstanding and all potential common shares which are
dilutive. The following information is a reconciliation of the amounts used in
these calculations:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- ---------
THREE THREE
MONTHS MONTHS
ENDED ENDED
MAR. 31, MAR. 31,
1997 1998
----------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DOLLAR
AMOUNTS)
<S> <C> <C>
Numerator:
Net income......................................... $1,373 $5,390
====== ======
Denominator:
Basic:
Weighted average shares outstanding................ 24,338 29,517
Effect of dilutive securities:
Stock options...................................... 1,556 1,974
------ ------
Diluted:
Weighted average shares outstanding-assuming
dilution.......................................... 25,894 31,491
====== ======
EPS:
Net income per common share........................ $ 0.06 $ 0.18
Net income per common share-assuming dilution...... 0.05 0.17
</TABLE>
F-27
<PAGE>
[OUTSIDE BACK COVER]
Pictures of a woman talking on the telephone, a man standing atop a diving
tower, two men conversing, birds flying and a ferris wheel, with the following
text:
SAGA--a leading enterprise solutions company invested in our customers'
success. We enable the linking of valuable information from the enterprise to
the Microsoft desktop, allowing people to make better informed business
decisions, respond more quickly to customers' needs and be more flexible to
changing market demands.
SAGA. FREE YOUR INFORMATION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses in connection with the issuance and
distribution of the securities being registered, all of which will be paid by
the Company.
<TABLE>
<S> <C>
SEC registration fee................................................ $50,830
NASD filing fee..................................................... $17,730
Blue Sky fees and expenses.......................................... $10,000
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Transfer agent and registrar fees................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law sets forth conditions
and limitations governing the indemnification of officers and directors of the
Company and certain other persons. The Company has adopted provisions in its
Second Amended and Restated Certificate of Incorporation and Third Amended and
Restated Bylaws which provide for indemnification of its officers and
directors to the maximum extent permitted under the Delaware General
Corporation Law.
As authorized by the Delaware General Corporation Law, the Company's Second
Amended and Restated Certificate of Incorporation limits the liability of
directors of the Company for monetary damages. The effect of this provision is
to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in certain limited situations. This provision does not limit
or eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of breach of a
director's duty of care. These provisions will not alter the liability of
directors under federal securities laws.
The Company has purchased an insurance policy which purports to insure the
officers and directors of the Company against certain liabilities incurred by
them in the discharge of their functions as such officers and directors except
for liabilities resulting from their own malfeasance. Under the terms of the
Underwriting Agreement, the Underwriters have agreed to indemnify, under
certain conditions, the Company, its directors, certain of its officers and
persons who control the Company within the meaning of the Securities Act
against certain civil liabilities and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement or the
inaccuracy of certain information set forth herein that was provided by the
Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Prior to February 25, 1997, the Company was an indirect wholly owned
subsidiary of SAG and on February 25, 1997, the Company became a direct wholly
owned subsidiary of SAG and SAG became the owner of the one then outstanding
share of the Company's common stock, par value $1.00 per share. On March 14,
1997, the Company issued a stock dividend to SAG resulting in 100,000
outstanding shares of common stock.
On March 31, 1997, the senior management of the Company and Thayer acquired
approximately 89% of the then outstanding Common Stock of the Company in the
Recapitalization pursuant to an agreement among the Company, SAG, Thayer and
the following officers of the Company: Daniel F. Gillis, Harry K. McCreery,
II-1
<PAGE>
Gary Hayes, James H. Daly, Derek M. Brigden and Thomas E. Gorley
(collectively, such individuals are referred to as the "Managers"). In
connection therewith, (i) 24,750,000 shares of Common Stock were repurchased
by the Company from SAG for an aggregate purchase price of DM 57.0 million
(approximately US$33.9 million), (ii) 20,678,350 shares of Common Stock were
issued and sold to Thayer for an aggregate purchase price of approximately
$30.4 million and (iii) an aggregate of 771,650 shares of Common Stock were
issued and sold to the Managers for an aggregate purchase price of
approximately $1.1 million. Of the Common Stock purchased by the Managers,
Messrs. Gillis and McCreery each purchased 204,050 shares and Messrs. Hayes,
Daly, Brigden and Gorley purchased 84,975, 108,625, 67,925 and 102,025 shares,
respectively. In consideration for the shares, each of Messrs. Gillis,
McCreery and Daly gave the Company a promissory note in an amount sufficient
to cover the purchase price of the shares. In consideration for the shares,
each of Messrs. Hayes, Brigden and Gorley paid the Company approximately
$74,900, $51,000, and $75,000 in cash, respectively, and gave the Company a
promissory note in an amount sufficient to cover the balance of the purchase
price of the shares. In addition, on August 22, 1997 the Company entered into
a subscription agreement with Timothy L. Hill, the Company's Vice President--
Marketing, pursuant to which the Company issued and sold to Mr. Hill 137,500
shares of Common Stock for an aggregate purchase price of $202,095. As of
December 31, 1997, the Company has also granted options to purchase an
aggregate of 5,069,900 shares of Common Stock under the Company's 1997 Stock
Option Plan at a weighted average exercise price equal to $4.66 per share. All
such options and shares of Common Stock were issued in private placements
exempt from registration under Section 4(2) of the Securities Act, or Rule 701
thereunder. No underwriters were involved in the sales or issuances of the
securities described above.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
An index to exhibits appears on page E-1.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 479(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN RESTON, VIRGINIA ON APRIL 21, 1998.
Software AG Systems, Inc.
/s/ Daniel F. Gillis
By: _________________________________
DANIEL F. GILLIS
DIRECTOR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON APRIL 21, 1998.
/s/ Daniel F. Gillis
By: _________________________________
DANIEL F. GILLIS
DIRECTOR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
/s/ Harry K. McCreery
By: _________________________________
HARRY K. MCCREERY
VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
*
By: _________________________________
CARL J. RICKERTSEN
CHAIRMAN OF THE BOARD OF DIRECTORS
*
By: _________________________________
DR. PHILIP S. DAUBER
DIRECTOR
*
By: _________________________________
DR. ERWIN KONIGS
DIRECTOR
*
By: _________________________________
EDWARD E. LUCENTE
DIRECTOR
*
By: _________________________________
DR. PAUL G. STERN
DIRECTOR
/s/ Harry K. McCreery
*By: ______________________________
HARRY K. MCCREERY
ATTORNEY-IN-FACT
II-3
<PAGE>
ACCOUNTANTS' REPORT ON SCHEDULE
Board of Directors
Software AG Systems, Inc.
The audits referred to in our report dated February 6, 1998, included the
related financial statement schedule for the periods from April 1, 1997 to
December 31, 1997, and from January 1, 1997 to March 31, 1997 and for each of
the years in the two-year period ended December 31, 1996, included in the
registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ KPMG Peat Marwick llp
Washington, D.C.
February 6, 1998
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PREDECESSOR:
1/1/95-12/31/95
Allowance for Doubtful Ac-
counts......................... $4,069,591 $2,331,608 $1,635,681 $4,765,518
1/1/96-12/31/96
Allowance for Doubtful Ac-
counts......................... 4,765,518 1,298,361 1,083,575 4,980,304
1/1/97-3/31/97
Allowance for Doubtful Ac-
counts......................... 4,980,304 204,406 (138,274) 5,322,984
- -------------------------------------------------------------------------------
SUCCESSOR:
4/1/97-12/31/97
Allowance for Doubtful Ac-
counts......................... $5,322,984 $4,964,967 $ 987,355 $9,300,596
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
****1 Form of Underwriting Agreement
* 3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant
**** 3.2 Third Amended and Restated Bylaws of the Registrant
* 4 Specimen Common Stock Certificate of the Registrant
***5 Opinion of Arnold & Porter regarding the legality of the shares of
Common Stock being registered
*10.1 Recapitalization Agreement among Software AG, Software AG Systems,
Inc., Thayer Equity Investors III, L.P. and certain Managers of
Software AG Systems, Inc. (dated as of March 18, 1997)
*10.2 Cooperation Agreement between Software AG and Software AG Americas,
Inc. (dated as of March 31, 1997)
*10.3 Share Purchase Agreement among Software AG Americas, Inc., Software
AG (Canada), Inc., Robert D. Nickel and Caelum Investments, Inc.
(dated as of September 26, 1997)
*10.4 Memorandum of Understanding between Daniel F. Gillis and Software AG
Systems, Inc. (dated as of April 24, 1997)
*10.5 Memorandum of Understanding between Harry K. McCreery and Software AG
Americas, Inc. (dated as of December 16, 1996)
*10.6 Memorandum of Understanding between Derek M. Brigden and Software AG
Americas, Inc. (dated as of December 13, 1996)
*10.7 Memorandum of Understanding between James H. Daly and Software AG
Americas, Inc. (dated as of December 18, 1996)
*10.8 Memorandum of Understanding between Thomas E. Gorley and Software AG
Americas, Inc. (dated as of August 22, 1996)
**10.9 Software AG Systems, Inc. 1997 Stock Option Plan, as amended
*10.10 Management and Consulting Agreement between TC Management LLC and
Software AG Americas, Inc. (dated as of April 1, 1997)
*10.11 Deferred Compensation Agreement between Daniel F. Gillis and Software
AG Americas, Inc. (dated as of July 1, 1995), as amended
*10.12 Deferred Compensation Agreement between James H. Daly and Software AG
Americas, Inc. (dated as of January 1, 1993), as amended
*10.13 Deferred Compensation Agreement between Harry K. McCreery and
Software AG Americas, Inc. (dated as of January 1, 1991), as amended
*10.14 Administrative Services Agreement between Software AG and Software AG
Americas, Inc. (dated as of March 31, 1997), as amended
*10.15 Registration Rights Agreement between Software AG Systems, Inc. and
Thayer Equity Investors III, L.P. (dated as of September 26, 1997)
*10.16 Subscription Agreement between Timothy L. Hill and Software AG
Systems, Inc. (dated as of August 22, 1997), as amended
*10.17 Shareholders Agreement among Software AG Systems, Inc., Thayer Equity
Investors III, L.P. and certain shareholders of Software AG Systems,
Inc. (dated as of April 1, 1997)
*10.18 Promissory Note made by Daniel F. Gillis (effective date March 24,
1997)
*10.19 Promissory Note made by Harry K. McCreery (effective date March 24,
1997)
*10.20 Promissory Note made by James H. Daly (effective date March 24, 1997)
*10.21 Promissory Note made by Harry K. McCreery (effective date August 9,
1996)
*10.22 Promissory Note made by James H. Daly (effective date August 9, 1996)
****11 Computations of Earnings per Share
****21 Subsidiaries of the Registrant
***23.1 Consent of Arnold & Porter (included in its opinion filed as Exhibit
5)
****23.2 Consent of KPMG Peat Marwick LLP
****24 Powers of Attorney
</TABLE>
* Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (File No. 333-36567) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (File No. 333-44687) and incorporated herein by reference.
*** To be filed by amendment.
**** Filed herewith.
<PAGE>
EXHIBIT 1
________ SHARES/1/
SOFTWARE AG SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
________ __, 1998
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
SOFTWARE AG SYSTEMS, INC., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule B hereto (hereafter called
the "Selling Stockholders") address you as the representatives (the
"Representatives") of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirm their respective agreements with the several Underwriters as follows:
1. Description of Shares. The Selling Stockholders, acting severally and
---------------------
not jointly, propose to sell an aggregate of _________ shares of the Company's
authorized and outstanding common stock, $.01 par value per share (the "Firm
Shares"), to the several Underwriters. Certain of the Selling Stockholders
also propose to grant, severally and not jointly, to the Underwriters an option
to purchase up to ________ additional shares of the Company's common stock,
$.01 par value per share (the "Option Shares"), as provided in Section 7 hereof.
As used in this Agreement, the term "Shares" shall include the Firm Shares and
the Option Shares. All shares of common stock, $.01 par value per share, of the
Company to be outstanding
__________________________
/1/
Plus an option to purchase up to ________ additional shares from certain
Selling Stockholders to cover over-allotments.
<PAGE>
after giving effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
-----------------------------------------------------------------
Selling Stockholders.
- --------------------
I. The Company represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
(a) A registration statement on Form S-1 (File No. 333-_____)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses") and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective
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<PAGE>
pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in
the event of any amendment thereto or the filing of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto
after the effective date of such registration statement, shall also mean (from
and after the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together with
any such abbreviated registration statement. The term "Prospectus" as used in
this Agreement shall mean the prospectus relating to the Shares as included in
such Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
Registration Statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations); provided, however, that if in reliance on Rule
-------- -------
434 of the Rules and Regulations and with the consent of BancAmerica Robertson
Stephens, on behalf of the several Underwriters, the Company shall have provided
to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable,
prior to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to
completion" (as defined in Rule 434(g) of the Rules and Regulations) last
provided to the Underwriters by the Company and circulated by the Underwriters
to all prospective purchasers of the Shares (including the information deemed to
be a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if
any revised prospectus shall be provided to the Underwriters by the Company for
use in connection with the offering of the Shares that differs from the
prospectus referred to in the immediately preceding sentence (whether or not
such revised prospectus is required to be filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any
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<PAGE>
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(iii) the Prospectus, and any amendments or supplements thereto, did not and
will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
-------- -------
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in or omitted from the Registration
Statement, any Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries (except one share of Software A.G. Venezolana,
C.A.) free and clear of any pledge, lien, security interest, encumbrance, claim
or equitable interest; each of the Company and its subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure to
be so qualified or be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; each of the Company and its subsidiaries
is in possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from state, federal and
other regulatory authorities which are material to the conduct of its business,
all of which are valid and in full force and effect; neither the Company nor any
of its subsidiaries is in violation of its respective charter or bylaws or in
default in the performance or observance of any material obligation, agreement,
covenant or condition contained in any material bond, debenture, note or other
evidence of indebtedness, or in any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its subsidiaries or their respective properties may be bound;
and neither the Company nor any of its subsidiaries is in material violation of
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties of which it has knowledge. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than those listed on Exhibit 21 to the Company's registration statement on
Form S-1 (File No. 333-36567).
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<PAGE>
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except as has been obtained under the Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (if applicable), or such as may be
required under state or other securities or Blue Sky laws.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the Company
(including the Shares) have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, were not issued in violation
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<PAGE>
of or subject to any preemptive rights or other rights to subscribe for or
purchase securities, and the authorized and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" and
conforms in all material respects to the statements relating thereto contained
in the Registration Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the capitalization of the
Company). No further approval or authorization of any stockholder, the Board of
Directors of the Company or others is required for the transfer of the Shares
except as may be required under the Act or under state or other securities or
Blue Sky laws. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable, and were not issued in violation of or subject to
any preemptive right, or other rights to subscribe for or purchase shares and
(except one share of Software A.G. Venezolana, C.A.) are owned by the Company
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest. Except as disclosed in the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the options
or other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) KPMG Peat Marwick LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1996 and 1997 and for each of the years in the three
years ended December 31, 1997 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company and
its subsidiaries at the respective dates and for the respective periods to which
they apply; and all audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included Registration Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change
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<PAGE>
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise, (ii) any transaction that is material to the Company and its
subsidiaries considered as one enterprise, except transactions entered into in
the ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) the agreements to which the
Company or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company and
its subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its subsidiaries has valid and enforceable leases for all properties described
in the Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against the
Company or any of its subsidiaries that might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; and all tax liabilities are adequately provided for on the books of
the Company and its subsidiaries.
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<PAGE>
(k) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor any
such subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is imminent;
and the Company is not aware of any existing or imminent labor disturbance by
the employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.
(n) The Common Stock is registered pursuant to Section 12(b) of
the Exchange Act and is listed on the New York Stock Exchange, and the Company
has taken no
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<PAGE>
action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the New York Stock Exchange, nor has the Company received any
notification that the Commission or the New York Stock Exchange is contemplating
terminating such registration or listing.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(q) Neither the Company nor any of its subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling
Stockholder and certain other beneficial owners of shares of Common Stock, who
collectively beneficially own at least that number of shares of Common Stock as
is described as being subject to such agreements under the caption "Shares
Eligible For Future Sale" in the Prospectus, has agreed in writing that such
person will not, for a period of 90 days from the date that the Registration
Statement is declared effective by the Commission (the "Lock-up Period"), offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to (collectively, a "Disposition") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of BancAmerica Robertson
Stephens. The foregoing restriction has
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<PAGE>
been expressly agreed to preclude the holder of the Securities from engaging in
any hedging or other transaction which is designed to or reasonably expected to
lead to or result in a Disposition of Securities during the Lock-up Period, even
if such Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its officers, directors and
stockholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other stockholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of BancAmerica Robertson
Stephens.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
--
seq.), or otherwise designated as a contaminated site under applicable state or
- ---
local law.
(u) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the
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<PAGE>
members of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes, relating to doing business with the Government of
Cuba or with any person or affiliate located in Cuba.
(x) The Company has filed with the Commission, on a timely basis,
all documents required to have been filed by the Company pursuant to the
Exchange Act or the rules and regulations promulgated thereunder. Each such
document, when filed with the Commission, conformed in all material respects to
the requirements thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date, and
on any later date on which Option Shares are purchased, will have valid
marketable title to the Shares to be sold by such Selling Stockholder, free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest other than pursuant to this Agreement; and upon delivery of such Shares
hereunder and payment of the purchase price as herein contemplated, each of the
Underwriters will obtain valid marketable title to the Shares purchased by it
from such Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling Stockholder's
property, encumbrance, claim or equitable interest, including any liability for
estate or inheritance taxes, or any liability to or claims of any creditor,
devisee, legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable),
executed and delivered, in the form heretofore furnished to the Representatives,
an irrevocable Power of Attorney (the "Power of Attorney") appointing Daniel F.
Gillis and Harry K. McCreery as attorneys-in-fact (collectively, the "Attorneys"
and individually, an "Attorney") and a Custody Agreement (the "Custody
Agreement") with the Company, as custodian (the "Custodian"); each of the Power
of Attorney and the Custody Agreement constitutes a valid and binding agreement
on the part of such Selling Stockholder, enforceable in accordance with its
terms, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and each of such Selling Stockholder's Attorneys, acting alone, is
authorized to execute and deliver this Agreement and the certificate referred to
in Section 6(i) hereof on behalf of such Selling Stockholder, to determine the
purchase price to be paid by the several Underwriters to such Selling
Stockholder as provided in Section 3 hereof, to authorize the delivery of the
Firm Shares and the Option Shares to be sold by such Selling Stockholder under
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this Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on behalf
of such Selling Stockholder of this Agreement and the sale and delivery of the
Firm Shares and the Option Shares to be sold by such Selling Stockholder under
this Agreement (other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the Commission),
the issuance of the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as may be
necessary under state or other securities or Blue Sky laws) have been obtained
and are in full force and effect; such Selling Stockholder, if other than a
natural person, has been duly organized and is validly existing in good standing
under the laws of the jurisdiction of its organization as the type of entity
that it purports to be; and such Selling Stockholder has full legal right, power
and authority to enter into and perform its obligations under this Agreement and
such Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up Period,
effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such Selling Stockholder, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of BancAmerica Robertson Stephens. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
Selling Stockholder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Such Selling
Stockholder also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of the securities held by
such Selling Stockholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by
such Selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
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<PAGE>
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder,
or any Firm Shares or Option Shares to be sold by such Selling Stockholder
hereunder, may be bound or, to the best of such Selling Stockholder's knowledge,
result in any violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over such Selling Stockholder or over
the properties of such Selling Stockholder, or, if such Selling Stockholder is
other than a natural person, result in any violation of any provisions of the
charter, bylaws or other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Firm Shares that is
contained in the representations and warranties of such Selling Stockholder in
such Selling Stockholder's Power of Attorney or set forth in the Registration
Statement or the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date, and on any later date on which Option
Shares are to be purchased, was or will be, true, correct and complete, and does
not, and at the time the Registration Statement became or becomes, as the case
may be, effective and at all times subsequent thereto up to and on the Closing
Date (hereinafter defined), and on any later date on which Option Shares are to
be purchased, will not, contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make such
information not misleading.
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<PAGE>
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise one of its Attorneys and BancAmerica Robertson Stephens prior to
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, if any statement to be made on behalf of such Selling
Stockholder in the certificate contemplated by Section 6(i) would be inaccurate
if made as of the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be.
(k) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by any of the other Selling Stockholders to the Underwriters pursuant to this
Agreement; such Selling Stockholder does not have, or has waived prior to the
date hereof, any registration right or other similar right to participate in the
offering made by the Prospectus, other than such rights of participation as have
been satisfied by the participation of such Selling Stockholder in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Stockholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(l) Such Selling Stockholder is not aware that any of the
representations and warranties of the Company set forth in Section 2.I. above is
untrue or inaccurate in any material respect. The sale of the Firm Shares and
the Option Shares by such Selling Stockholder is not prompted by any information
concerning the Company which is not set forth in the Registration Statement and
Prospectus. The information pertaining to such Selling Stockholder under the
caption "Principal and Selling Stockholders" in the Prospectus is complete and
accurate in all material respects.
(m) At the time the Registration Statement became effective, the
Registration Statement and any amendment or supplement thereto did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and the
Prospectus, or any supplement or amendment thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or any later
date on which the Option Shares are to be purchased, as the case may be, did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
3. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Selling Stockholders agree, severally
and not jointly, to sell to the Underwriters, and
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<PAGE>
each Underwriter agrees, severally and not jointly, to purchase from the Selling
Stockholders, at a purchase price of $____ per share, the respective number of
Firm Shares set forth opposite the names of the Selling Stockholders in Schedule
B hereto. The obligation of each Underwriter to each Selling Stockholder shall
be to purchase from such Selling Stockholder that number of Firm Shares which
(as nearly as practicable, as determined by you) is in the same proportion to
the number of Firm Shares set forth opposite the name of such Selling
Stockholder in Schedule B hereto as the number of Firm Shares which is set forth
opposite the name of such Underwriter in Schedule A hereto (subject to
adjustment as provided in Section 10) is to the total number of Firm Shares to
be purchased by all the Underwriters under this Agreement.
The certificates in negotiable form for the Firm Shares to be sold by
the Selling Stockholders have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Stockholder agrees that
the certificates for the Firm Shares and the Option Shares of such Selling
Stockholder so held in custody are subject to the interests of the Underwriters
hereunder, that the arrangements made by such Selling Stockholder for such
custody, including the Power of Attorney is to that extent irrevocable and that
the obligations of such Selling Stockholder hereunder shall not be terminated by
the act of such Selling Stockholder or by operation of law, whether by the death
or incapacity of such Selling Stockholder or the occurrence of any other event,
except as specifically provided herein or in the Custody Agreement. If any
Selling Stockholder should die or be incapacitated, or if any other such event
should occur, before the delivery of the certificates for the Firm Shares and
the Option Shares hereunder, the Firm Shares and the Option Shares to be sold by
such Selling Stockholder shall, except as specifically provided herein or in the
Custody Agreement, be delivered by the Custodian in accordance with the terms
and conditions of this Agreement as if such death, incapacity or other event had
not occurred, regardless of whether the Custodian shall have received notice of
such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by wire
transfer or by certified or official bank check or checks drawn in same-day
funds, payable to the order of the Custodian for the respective accounts of the
Selling Stockholders with regard to the Shares being purchased from such Selling
Stockholders, at the offices of Arnold & Porter (or at such other place as may
be agreed upon among the Representatives and the Company and the Attorneys), at
7:00 A.M., San Francisco time (a) on the third (3rd) full business day following
the first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business
day following the day that this Agreement is executed and delivered or (c) at
such other time and date not later than seven (7) full business days following
the first day that Shares are traded as the Representatives and the Company and
the Attorneys may determine (or at such time and date to which payment and
delivery shall have been postponed pursuant to Section 10 hereof), such time and
date of payment and delivery being herein called the "Closing Date;" provided,
--------
however, that if the Company has not made available to the Representatives
- -------
copies of the Prospectus within the time provided in Section 4(d) hereof, the
Representatives may, in their
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sole discretion, postpone the Closing Date until no later than two (2) full
business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you may request, such request to be made at least two
(2) full business days prior to the Closing Date. If the Representatives so
elect, delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by the
Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
in the table included within the first paragraph and the [second, sixth, seventh
and eighth paragraphs and the first and last sentences of the tenth paragraph]
under the caption "Underwriting" in any Preliminary Prospectus and in the
Prospectus constitutes the only information furnished by the Underwriters to the
Company for inclusion in any Preliminary Prospectus, the Prospectus or the
Registration Statement, and you, on behalf of the respective Underwriters,
represent and warrant to the Company and the Selling Stockholders that the
statements made therein do not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will
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<PAGE>
notify you, promptly after it shall receive notice thereof, of the time when the
Registration Statement, any subsequent amendment to the Registration Statement
or any abbreviated registration statement has become effective or any supplement
to the Prospectus has been filed; if the Company omitted information from the
Registration Statement at the time it was originally declared effective in
reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the Company will provide evidence satisfactory to you that the
Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as
applicable, of the Rules and Regulations, have been filed, within the time
period prescribed, with the Commission pursuant to subparagraph (7) of Rule
424(b) of the Rules and Regulations; if for any reason the filing of the final
form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that
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<PAGE>
purpose; and it will promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal at the earliest possible moment if
such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancAmerica Robertson Stephens, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its stockholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to the Representatives (i) concurrently with furnishing such reports to
its stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports
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<PAGE>
(financial or other) mailed to stockholders, (iv) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the National Association of Securities
Dealers, Inc. ("NASD"), and (v) every material press release in respect of the
Company or its affairs which was generally released to stockholders or prepared
by the Company or any of its subsidiaries. During such five (5) year period, if
the Company shall have active subsidiaries, the foregoing financial statements
shall be on a consolidated basis to the extent that the accounts of the Company
and its subsidiaries are consolidated, and shall be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(g) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(h) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(i) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will
consult with you concerning the substance of and the advisability of
disseminating a press release or other public statement responding to or
commenting on such rumor, publication or event.
(j) During the Lock-up Period, the Company will not, without the
prior written consent of BancAmerica Robertson Stephens, effect the Disposition
of, directly or indirectly, any Securities other than the Company's issuance of
options or Common Stock under the Company's presently authorized 1997 Stock
Option Plan (the "Option Plan").
5. Expenses.
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(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company and the Selling Stockholders will pay and
bear all costs and expenses in connection with the preparation, printing and
filing of the Registration
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<PAGE>
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
NASD filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Stockholders and the Company hereby agree to pay, but shall
not affect any agreement which the Selling Stockholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under Section
8(b) hereof, each Selling Stockholder agrees that, as an interim measure during
the pendency of any
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claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
such Selling Stockholder's obligation to reimburse the Underwriters for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Selling Stockholders, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Underwriters within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for
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expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c)
hereof or the obligation to contribute to expenses which is created by the
provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of Arnold & Porter, counsel for the Company and the Selling
Stockholders, dated the Closing Date or such later date on which Option Shares
are to be purchased addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
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(i) The Company and each Significant Subsidiary (as that
term is defined in Regulation S-X of the Act) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(iii) To such counsel's knowledge, the Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than Systems Software I, Inc., Software AG Americas, Inc. ("SAGA"),
Insight Consulting, Inc., Software AG Professional Services, Inc., Argenta,
Inc., Software AG Insurance Solutions, Inc., Software A.G. Venezolana, C.A.,
Software AG Americas, Latin America Operations, S.A. de C.V., SAG Systems
(Canada) Holdings Ltd., Software AG Systems (Canada) Inc. and Software AG of
Canada, Inc. Other than SAGA, none of such subsidiaries constitutes a
"significant subsidiary" (as that term is defined in Regulation S-X of the Act)
and all such subsidiaries (excluding SAGA), considered in the aggregate as a
single subsidiary, would not constitute a "significant subsidiary;"
(iv) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company (including the Shares) have been duly and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or
other similar right;
(v) The Company has the corporate power and authority to
enter into this Agreement and to perform its obligations hereunder;
(vi) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization, execution and
delivery by you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification provisions may be
limited by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting creditors' rights generally or by general equitable principles;
(vii) The Registration Statement has become effective under
the Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Act;
(viii) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting
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schedules) and financial data derived therefrom as to which such counsel need
express no opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of the Act
and the applicable Rules and Regulations;
(ix) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply with
Delaware law;
(x) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xi) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification obligations hereunder, concerning which no opinion
need be expressed) will not (a) result in any violation of the Company's charter
or bylaws or (b) to such counsel's knowledge, result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
any bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument filed as an exhibit to the Registration Statement,
or any applicable statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(xiii) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(xiv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or any of its
subsidiaries
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of a character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(xv) To such counsel's knowledge, neither the Company
nor any of its subsidiaries is presently (a) in material violation of its
respective charter or bylaws or (b) in material breach of any applicable
statute, rule or regulation or any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(xvi) To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights;
(xvii) Each Selling Stockholder which is not a natural
person has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of each Selling Stockholder that is not
a natural person has been duly authorized by such Selling Stockholder; the Power
of Attorney and Custody Agreement of each Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of each Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(xviii) Each of the Selling Stockholders has full right,
power and authority to enter into and to perform its obligations under this
Agreement and to sell, transfer, assign and deliver the Shares to be sold by
such Selling Stockholder hereunder;
(xix) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of each Selling Stockholder; and
(xx) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will receive valid
marketable title to the Shares purchased by it from such Selling Stockholder,
free and clear of any pledge, lien,
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security interest, encumbrance, claim or equitable interest. In rendering such
opinion, such counsel may assume that the Underwriters are without notice of any
defect in the title of the Shares being purchased from the Selling Stockholders.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the State of Delaware upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, the Selling Stockholders or officers of
the Selling Stockholders (when the Selling Stockholder is not a natural person),
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, the
following opinion of the General Counsel of the Company dated the Closing Date
or such later date on which Option Shares are to be purchased addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that:
(i) The Company and SAGA are each duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction,
if any, in which the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material
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adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise.
The Company does not own or control, directly or indirectly, any corporation,
association or other entity other than Systems Software I, Inc., SAGA, Insight
Consulting, Inc., Software AG Professional Services, Inc., Argenta, Inc.,
Software AG Insurance Solutions, Inc., Software A.G. Venezolana, C.A., Software
AG Americas, Latin America Operations, S.A. de C.V., SAG Systems (Canada)
Holdings Ltd., Software AG Systems (Canada) Inc. and Software AG of Canada,
Inc.;
(ii) All issued and outstanding shares of capital stock of
each subsidiary of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, and, to such counsel's knowledge, have not
been issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right and are owned
by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(iii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than performance of
the Company's indemnification obligations hereunder, concerning which no opinion
need be expressed) will not (a) result in any violation of the Company's charter
or bylaws or (b) result in a material breach or violation of any of the terms
and provisions of, or constitute a default under, any bond, debenture, note or
other evidence of indebtedness, or any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument
known to such counsel to which the Company is a party or by which its properties
are bound, or any applicable statute, rule or regulation known to such counsel
or any order, writ or decree known to such counsel of any court, government or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries, or over any of their properties or operations;
(iv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with the consummation by the
Company of the transactions herein contemplated, except such as have been
obtained under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the distribution
of the Shares by the Underwriters;
(v) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations, other than
those described therein;
(vi) To such counsel's knowledge, neither the Company nor
any of its subsidiaries is presently (a) in material violation of its respective
charter or bylaws or (b) in material breach of any applicable statute, rule or
regulation or any order, writ or decree of any
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<PAGE>
court or governmental agency or body having jurisdiction over the Company or any
of its subsidiaries, or over any of their properties or operations; and
(vii) To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to securities of
the Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having rights known to such
counsel to registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company have, with
respect to the offering contemplated thereby, waived such rights or such rights
have expired by reason of lapse of time following notification of the Company's
intent to file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction of
such rights.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Hale and Dorr LLP, in form and substance satisfactory to you, with respect to
the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from KPMG Peat Marwick LLP addressed to the Underwriters, dated the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be, confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
five (5) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from KPMG Peat Marwick LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the
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Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the consolidated
balance sheets of the Company as of December 31, 1996 and 1997 and related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, (iii) state
that KPMG Peat Marwick LLP has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of KPMG Peat Marwick LLP as described in
SAS 71 on the financial statements for the [three month periods ended March 31,
1997 and 1998] (the "Quarterly Financial Statements"), (iv) state that in the
course of such review, nothing came to their attention that leads them to
believe that any material modifications need to be made to any of the Quarterly
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented, and (v) address other matters agreed upon by KPMG Peat Marwick LLP
and you. In addition, you shall have received from KPMG Peat Marwick LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1997, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing Date or
any later date on which Option Shares are to be purchased, as the case may be,
and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and
at all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the
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<PAGE>
Registration Statement, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or supplement thereto,
did not and does not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is material
to the Company and its subsidiaries considered as one enterprise, except
transactions entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(d) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries or (f) any loss or damage (whether or not insured) to the property
of the Company or any of its subsidiaries which has been sustained or will have
been sustained which has a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(i) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect on
the Closing Date or on any later date on which Option Shares are to be
purchased, as the case may be; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be.
(j) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Stockholder and such
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beneficial owners of shares of Common Stock as are described in Section 2.I(s)
in writing prior to the date hereof that such person will not, during the Lock-
up Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) with the prior written consent of
BancAmerica Robertson Stephens. The foregoing restriction shall have been
expressly agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected to lead
to or result in a Disposition of Securities during the Lock-up Period, even if
such Securities would be disposed of by someone other than the such holder.
Such prohibited hedging or other transactions would including, without
limitation, any short sale (whether or not against the box) or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to any Securities or with respect to any security (other
than a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from Securities. Furthermore, such person will
have also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(k) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Stockholders hereby grant, severally and not jointly, to the
several Underwriters, for the purpose of covering over-allotments in connection
with the distribution and sale of the Firm Shares only, a nontransferable option
to purchase up to an aggregate of ________ Option Shares at the purchase price
per share for the Firm Shares set forth in Section 3 hereof. Such option may be
exercised by the Representatives on behalf of the several Underwriters on one
(1) or more occasions in whole or in part during the period of thirty (30) days
after the date on which the
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Firm Shares are initially offered to the public, by giving written notice to the
Company and the Attorneys. The maximum aggregate number of shares of Option
Shares to be sold by each such Selling Stockholder is set forth opposite its
name on Schedule B hereto. The number of Option Shares to be purchased by each
Underwriter upon the exercise of such option shall be the same proportion of the
total number of Option Shares to be purchased by the several Underwriters
pursuant to the exercise of such option as the number of Firm Shares purchased
by such Underwriter (set forth in Schedule A hereto) bears to the total number
of Firm Shares purchased by the several Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid fractional
shares. In the case of a partial exercise of such option, the number of Option
Shares to be sold by each such Selling Stockholder shall be the same proportion
of the total number of Option Shares to be purchased pursuant to such exercise
as the number of Option Shares set forth opposite such Selling Stockholder's
name on Schedule B hereto bears to the aggregate maximum number of Option Shares
to be sold by all of such Selling Stockholders as set forth on Schedule B,
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same-day funds, payable to the order of the Custodian for the
respective accounts of such Selling Stockholders. Such delivery and payment
shall take place at the offices of Arnold & Porter or at such other place as may
be agreed upon among the Representatives, the Company and the Attorneys (i) on
the Closing Date, if written notice of the exercise of such option is received
by the Company and the Attorneys at least two (2) full business days prior to
the Closing Date, or (ii) on a date which shall not be later than the third
(3rd) full business day following the date the Company and the Attorneys receive
written notice of the exercise of such option, if such notice is received by the
Company and the Attorneys less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased
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by such Underwriter or Underwriters. Any such payment by you shall not relieve
any such Underwriter or Underwriters of any of its or their obligations
hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Stockholders herein, to the accuracy of the statements of the Company, the
Selling Stockholders and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, to the conditions set forth in Section 6
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company and the Selling Stockholders or
the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of the Bylaws of the NASD), under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
-------- -------
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that
-------- -------
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<PAGE>
the indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been sent or
given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Subject to subsection 8(f) below, each Selling Stockholder,
severally and not jointly, agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of the Bylaws of the NASD) under the Act, the
Exchange Act or otherwise, specifically including, but not limited to, losses,
claims, damages or liabilities (or actions in respect thereof) arising out of or
based upon (i) any breach of any representation, warranty, agreement or covenant
of such Selling Stockholder herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the indemnity agreement
-------- -------
provided in this Section 8(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act and the Rules and Regulations, unless such failure
is the result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
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<PAGE>
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and each such Selling Stockholder
for any legal or other expenses reasonably incurred by the Company and each such
Selling Stockholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Stockholder and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
-------- -------
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal
-35-
<PAGE>
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a),
8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
--------
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
- -------- -------
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
any Selling Stockholder within the meaning of the Act or the Exchange Act and
-36-
<PAGE>
each officer of the Company who signed the Registration Statement and each
director of the Company.
(f) No Selling Stockholder shall be required to provide
indemnification hereunder until the Underwriter or any person controlling within
the meaning of the Act or the Exchange Act seeking indemnification shall have
first made a demand for payment on the Company with respect to any such loss,
claim, damage or liability and the Company shall have either rejected such
demand or failed to make such requested payment within 60 days after receipt
thereof. In addition, the liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Shares
sold by such Selling Stockholder to the Underwriters minus the amount of the
underwriting discount paid thereon to the Underwriters by such Selling
Stockholder. The Company and such Selling Stockholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
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<PAGE>
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
-38-
<PAGE>
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
-39-
<PAGE>
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel, with a copy to Hale and Dorr LLP, 60
State Street, Boston, Massachusetts 02109, telecopier number (617) 526-5000,
Attention: Peter B. Tarr; if sent to the Company, such notice shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to 11190 Sunrise Valley Drive, Reston, Virginia 20191, telecopier number
(703) 391-8290, Attention: Daniel F. Gillis, Chief Executive Officer, with a
copy to Arnold & Porter, 555 12th Street, N.W., Washington, D.C. 20004,
telecopier number (202) 942-5999, Attention: Robert Ott; if sent to one or more
of the Selling Stockholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Daniel F. Gillis and Harry K. McCreery, as Attorneys-in-Fact for the Selling
Stockholders, at 11190 Sunrise Valley Drive, Reston, Virginia 20191, telecopier
number (703) 391-8290, with a copy to Arnold & Porter, 555 12th Street, N.W.,
Washington, D.C. 20004, telecopier number (202) 942-5999, Attention: Robert Ott.
13. Parties. This Agreement shall inure to the benefit of and be binding
-------
upon the several Underwriters and the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8 hereof, any legal or equitable right, remedy or claim
in respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
BancAmerica Robertson Stephens on behalf of you.
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<PAGE>
14. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
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<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
SOFTWARE AG SYSTEMS, INC.
By________________________________________________
SELLING STOCKHOLDERS
By________________________________________________
Attorney-in-Fact for the Selling Stockholders
noted above and named in Schedule B hereto
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCAMERICA ROBERTSON STEPHENS
By___________________________
Authorized Signatory
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<PAGE>
SCHEDULE A
Underwriters Number of Firm Shares To Be Purchased
------------ -------------------------------------
BancAmerica Robertson Stephens
Donaldson, Lufkin & Jenrette
Securities Corporation
TOTAL
<PAGE>
SCHEDULE B
Name of Selling Number of Firm Number of Option
Stockholder Shares To Be Sold Shares To Be Sold
- --------------- ----------------- -----------------
Thayer Equity Investors
III, L.P.
TC Co-Investors, LLC
[other]
Total:
<PAGE>
Exhibit 3.2
THIRD AMENDED AND RESTATED BYLAWS OF
Software AG Systems, Inc.
(as amended on April 16, 1998)
ARTICLE I.
Offices
Section 1.1. Registered Office. The registered office of Software AG
-----------------
Systems, Inc. (hereinafter called the "Corporation") within the State of
Delaware shall be at 1209 Orange Street, Wilmington, Delaware 19801, and the
name of the registered agent of the Corporation at such address shall be The
Corporation Trust Company.
Section 1.2. Executive Office. The principal executive office of the
----------------
Corporation shall be located in Reston, Virginia or such other location as may
be specified by the Board of Directors (hereinafter sometimes referred to as the
"Board"). The books of account and records shall be kept in such office.
Section 1.3. Other Offices. The Corporation may also have offices at
-------------
such other places, both within and without the State of Delaware, as the Board
of Directors from time to time shall determine or the business of the
Corporation may require.
ARTICLE II.
Meetings of Stockholders
Section 2.1. Place of Meetings. All meetings of the stockholders shall
-----------------
be held at any such place, either within or without the State of Delaware, as
shall be designated from time to time by the Board of Directors and stated in
the notice of meeting or in a duly executed waiver thereof.
Section 2.2. Annual Meeting. The annual meeting of the stockholders for
--------------
the election of directors and for the transaction of such other business as may
come before the meeting shall be held at such time and place as shall be
determined by the Chief Executive Officer or the Board of Directors and stated
in the notice of the meeting. Only such business may be conducted as has been
brought before an annual meeting of stockholders by, or at the direction of, the
Board of Directors or by a stockholder who has given timely written notice to
the
<PAGE>
- 2 -
Secretary of the Company of such stockholder's intention to bring such business
before the meeting pursuant to these Bylaws.
Section 2.3. Special Meetings. Special meetings of the stockholders,
----------------
for any purpose or purposes, unless otherwise prescribed by statute, may be
called only by the Board, the Chairman of the Board or the Chief Executive
Officer. The only business which may be conducted at such a meeting, other than
procedural matters and matters relating to the conduct of the meeting, shall be
the matter or matters described in the notice of the meeting.
Section 2.4. Notice of Meetings. Notice of meetings of stockholders
------------------
shall be given as required by applicable law not less than ten days nor more
than sixty days before such meeting (unless a different time is specified by
law) to every stockholder entitled by law to notice of such meeting. Notice of
any such meeting need not be given to any stockholder who shall, either before
or after the meeting, submit a signed waiver of notice or who shall attend such
meeting, except when he shall attend for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
Section 2.5. List of Stockholders. A complete list of the stockholders
--------------------
entitled to vote at any meeting of stockholders, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder, shall be prepared by the Secretary and shall be
open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held,
for at least ten days before the meeting and at the place of the meeting during
the whole time of the meeting.
Section 2.6. Quorum. A majority in voting power of the outstanding
------
shares of the Corporation entitled to vote on the matters at issue, present in
person or represented by proxy, shall constitute a quorum, except as otherwise
required by the Delaware General Corporation Law (the "DGCL") . When a quorum
is once present to organize a meeting of stockholders, it is not broken by the
subsequent withdrawal of any stockholders.
<PAGE>
- 3 -
The holders of a majority of the voting power of the outstanding shares present
in person or represented in proxy and entitled to vote at any meeting of
stockholders, may adjourn such meeting from time to time without notice other
than an announcement at the meeting, whether or not a quorum is present. At any
such adjourned meeting at which there is a quorum, any business may be
transacted that might have been transacted at the meeting originally called.
Section 2.7. Organization. At every meeting of stockholders, the
------------
Chairman of the Board, or in his absence or inability to act, the Chief
Executive Officer or, in his absence or inability to act, the person whom the
Chief Executive Officer shall appoint, shall act as chairman of, and preside at,
the meeting. The Secretary or, in his absence or inability to act, the person
whom the chairman of the meeting shall appoint secretary of the meeting, shall
act as secretary of the meeting and keep the minutes thereof.
Section 2.8. Order of Business. The order of business at all meetings
-----------------
of the stockholders shall be as determined by the chairman of the meeting.
Section 2.9. Stockholder Nominations and Proposals. (a) No proposal
-------------------------------------
for a stockholder vote shall be submitted by a stockholder (a "Stockholder
Proposal") to the Corporation's stockholders unless the stockholder submitting
such proposal (the "Proponent") shall have filed a written notice setting forth
with particularity (i) the names and business addresses of the Proponent and all
Persons (as such term is defined in Section 3(a)(9) of the Securities Exchange
Act of 1934, as amended through the date of adoption of these Bylaws) acting in
concert with the Proponent; (ii) the names and addresses of the Proponent and
the Persons identified in clause (i), as they appear on the Corporation's books
(if they so appear); (iii) the class and number of shares of the Corporation
beneficially owned by the Proponent and the Persons identified in clause (i);
(iv) a description of the Stockholder Proposal containing all material
information relating thereto; and (v) such other information as the Board of
Directors reasonably determines is necessary or appropriate to enable the Board
of Directors and stockholders of the Corporation to consider the Stockholder
Proposal. Upon receipt of the Stockholder Proposal and prior to the stockholder
meeting at which such Stockholder Proposal will be considered, if the Board of
Directors or a designated committee or the
<PAGE>
- 4 -
officer who will preside at the stockholders meeting determines that the
information provided in a Stockholder Proposal does not satisfy the
informational requirements of these Bylaws or is otherwise not in accordance
with law, the Secretary of the Corporation shall promptly notify such Proponent
of the deficiency in the notice. Such Proponent shall have an opportunity to
cure the deficiency by providing additional information to the Secretary within
the period of time, not to exceed five days from the date such deficiency notice
is given to the Proponent, determined by the Board of Directors, such committee
or such officer. If the deficiency is not cured within such period, or if the
Board of Directors, such committee or such officer determines that the
additional information provided by the Proponent, together with the information
previously provided, does not satisfy the requirements of this Section 2.9, then
such proposal shall not be presented for action at the meeting in question.
(b) Only persons who are selected and recommended by the Board of
Directors or the Nominating Committee thereof, or who are nominated by
stockholders in accordance with the procedures set forth in this Section 2.9,
shall be eligible for election, or qualified to serve, as directors.
Nominations of individuals for election to the Board of Directors of the
Corporation at any annual meeting or any special meeting of stockholders at
which directors are to be elected may be made by any stockholder of the
Corporation entitled to vote for the election of directors at that meeting by
compliance with the procedures set forth in this Section 2.9. Nominations by
stockholders shall be made by written notice (a "Nomination Notice"), which
shall set forth (i) as to each individual nominated, (A) the name, date of
birth, business address and residence address of such individual; (B) the
business experience during the past five years of such nominee, including his or
her principal occupations and employment during such period, the name and
principal business of any corporation or other organization in which such
occupations and employment were carried on and such other information as to the
nature of his or her responsibilities and level of professional competence as
may be sufficient to permit assessment of his or her prior business experience;
(C) whether the nominee is or has ever been at any time a director, officer or
owner of 5% or more of any class of capital stock, partnership interests or
other equity interest of any corporation, partnership or other entity; (D) any
directorships held by such nominee
<PAGE>
- 5 -
in any company with a class of securities registered pursuant to section 12 of
the Securities Exchange Act of 1934, as amended, or subject to the requirements
of section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940, as amended; and (E) whether, in the
last five years, such nominee has been convicted in a criminal proceeding or has
been subject to a judgment, order, finding or decree of any federal, state or
other governmental entity, concerning any violation of federal, state or other
law, or any proceeding in bankruptcy, which conviction, judgment, order,
finding, decree or proceeding may be material to an evaluation of the ability or
integrity of the nominee; and (ii) as to the Person submitting the Nomination
Notice and any Person acting in concert with such Person, (x) the name and
business address of such Persons, (y) the name and address of such Persons and
as they appear on the Corporation's books (if they so appear) and (z) the class
and number of shares of the Corporation which are beneficially owned by such
Persons. A written consent to being named in a proxy statement as a nominee, and
to serve as a director if elected, signed by the nominee, shall be filed with
any Nomination Notice. If the presiding officer at any stockholders meeting
determines that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, he shall so declare to the meeting and the defective
nomination shall be disregarded.
(c) Subject to applicable law, Nomination Notices and Stockholder
Proposals shall be delivered to the Secretary at the principal executive office
of the Corporation not less than one hundred twenty (120) and not more than one
hundred fifty (150) days prior to the date of the Corporation's proxy statement
released to stockholders in connection with the previous year's annual meeting
of stockholders if such Nomination Notice or Stockholder Proposal is to be
submitted at an annual stockholders meeting. Nomination Notices and Stockholder
Proposals shall be delivered to the Secretary at the principal executive office
of the Corporation no later than the close of business on the tenth day
following the day on which notice of the date of a special meeting of
stockholders was given if the Nomination Notice or Stockholder Proposal is to be
submitted at a special stockholders meeting.
<PAGE>
- 6 -
(d) The provisions of this Section 2.9 shall become effective upon the
consummation of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (an "IPO").
Section 2.10. Voting. Unless otherwise provided in a resolution or
------
resolutions providing for any class or series of Preferred Stock pursuant to
Article IV of the Corporation's Certificate of Incorporation (the "Certificate
of Incorporation"), any other provision of the Certificate of Incorporation or
the DGCL, every stockholder shall be entitled to one vote, in person or by
written proxy, for each share of capital stock held of record by such
stockholder which is entitled to vote generally in the election of directors.
If the Certificate of Incorporation provides for more or less than one vote for
any share, on any matter, every reference in these Bylaws or the DGCL to a
majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock. The provisions of Section 212 and 217 of
the DGCL shall apply in determining whether any shares of capital stock may be
voted and the persons, if any, entitled to vote such shares, but the Corporation
shall be protected in treating the persons in whose names shares of capital
stock stand on the record of stockholders as owners thereof for all purposes.
All elections for the Board of Directors shall be decided by a plurality of the
votes cast and all other questions shall be decided by a majority of the votes
cast, except as otherwise required by law, by the Certificate of Incorporation
or by these Bylaws. Abstentions shall not be considered to be votes cast. In
voting on any question on which a vote by ballot is required by law, by the
Certificate of Incorporation, or is demanded by any stockholder entitled to
vote, the voting shall be by written ballot. Each ballot shall be signed by the
stockholder voting or by his proxy, and shall state the number of shares voted.
On all other questions, the voting may be viva voce. Every stockholder entitled
---------
to vote at a meeting of stockholders may authorize another person or persons to
act for him by proxy. The validity and enforceability of any proxy shall be
determined in accordance with applicable law.
Section 2.11. Inspectors. The Board of Directors may, in advance of any
----------
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the
<PAGE>
-7-
chairman of the meeting shall, or if inspectors shall not have been appointed,
the chairman of the meeting may, appoint one or more inspectors. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors shall
determine the number of shares of capital stock of the Corporation outstanding
and the voting power of each, the number of shares represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the results, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting, the inspectors shall make a report in writing of
any challenge, request or matter determined by them and shall execute a
certificate of any fact found by them. No director or candidate for the office
of director shall act as an inspector of an election of directors. Inspectors
need not be stockholders.
ARTICLE III.
Board of Directors
Section 3.1. General Powers. The business and affairs of the
--------------
Corporation shall be managed by or under the direction of the Boards of
Directors.
Section 3.2. Number, Qualifications, Election and Term of Office. The
---------------------------------------------------
Board shall consist of six (6) directors, provided that the Board from time to
time may increase or decrease the number of directors to any number not less
than one, and provided that, after consummation of an IPO, the number of
directors shall not be increased by fifty percent (50%) or more in any twelve-
month period without the approval by at least sixty-six and two-thirds percent
(66 2/3%) of the members of the Board of Directors then in office. No reduction
in the number of directors shall have the effect of shortening the term of any
director in office at the time such reduction becomes effective. The retirement
age of and other restrictions and qualifications for directors constituting the
Board of Directors shall be as authorized from time to time by a majority vote
of the members of the Board of Directors then in office. Members of the Board
need not be
<PAGE>
- 8 -
residents of the State of Delaware and need not be stockholders of the
Corporation. Unless otherwise provided in the Certificate of Incorporation, each
director shall be elected at the annual meeting of the stockholders and shall
hold office until his successor shall have been elected and qualified or until
his earlier death, removal or resignation in the manner provided herein.
Section 3.3. Place of Meetings. Meetings of the Board of Directors
-----------------
shall be held at such place or places, within or without the State of Delaware,
as the Board of Directors may from time to time determine or as shall be
specified in the notice of any such meeting. Each regular meeting of the Board
of Directors shall be held at the location specified in the notice with respect
to such meeting or, if no such notice is provided or no location is specified
therein, at the principal executive offices of the Corporation.
Section 3.4. Annual Meeting. The Board of Directors shall meet for the
--------------
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting of stockholders
shall be held. Notice of such Board meeting need not be given. In the event
such annual meeting of stockholders is not so held, the annual meeting of the
Board of Directors may be held at such other time or place (within or without
the State of Delaware) as shall be specified in a notice thereof given as
hereinafter provided in Section 3.7 hereof.
Section 3.5. Regular Meetings. Regular meetings of the Board of
----------------
Directors shall be held at such time and place as the Board of Directors may
fix. Notice of regular meetings of the Board of Directors need not be given
except as otherwise required by applicable law or these Bylaws.
Section 3.6. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by the Chairman of the Board of Directors or at the
request of a majority of the directors.
Section 3.7. Notice of Meetings. Notice of each special meeting of the
------------------
Board of Directors (and of each regular meeting for which notice shall be
required) shall be given by the Secretary as hereinafter provided in this
Section 3.7, in which notice shall stated the
<PAGE>
- 9 -
time and place of the meeting. Notice of a special meeting shall state the
general purpose of the meeting, but other routine business may be conducted at a
special meeting without such matter being stated in the notice. Notice of each
such meeting shall be (i) mailed, postage prepaid, to each director at his
designated address at least seven days before the day on which such meeting is
to be held, (ii) sent by overnight courier to each director at his designated
address at least two days before the day on which such meeting is to be held
(with delivery scheduled to occur no later than the day before the meeting), or
(iii) given orally by telephone or other means, or by facsimile, telegraph,
cable, telex, telecopier or other similar means, to each director at his
designated address at least twenty-four hours before the time at which such
meeting is to be held. Notice of any such meeting need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of notice or who shall attend such meeting, except when he shall attend for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 3.8. Quorum and Manner of Acting. A majority of the entire
---------------------------
Board of Directors shall constitute a quorum for the transaction of business at
any meeting of the Board of Directors, and, except as otherwise expressly
required by the DGCL, the Certificate of Incorporation or these Bylaws, the act
of a majority of the directors then in office shall be the act of the Board of
Directors at any such meeting. In the absence of a quorum at any meeting of the
Board of Directors, a majority of the directors present thereat may adjourn such
meeting to another time and place. Notice of the time and place of any such
adjourned meeting shall be given to all of the directors unless such time and
place were announced at the meeting at which the adjournment was taken, in which
case such notice shall only be given to the directors who were not present
thereat. At any adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the meeting as originally
called. The directors shall act only as a Board and the individual directors
shall have no power as such.
Section 3.9. Organization. At each meeting of the Board of Directors,
------------
the Chairman of the Board or, in his absence, another director chosen by a
majority of the directors present, shall act as chairman of the meeting and
preside thereat. The Secretary or, in his
<PAGE>
- 10 -
absence, any person appointed by the chairman, shall act as secretary of the
meeting and keep the minutes thereof.
Section 3.10. Resignations. Any director of the Corporation may resign
------------
at any time by giving written notice of his resignation to the Chairman of the
Board, the Chief Executive Officer, or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt.
Unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 3.11. Compensation. Directors shall receive such compensation,
------------
including fees and reimbursement of expenses, for their services as the Board of
Directors may determine. Any director may serve the Corporation in any other
capacity and receive compensation therefor.
Section 3.12. Action by Consent. Unless restricted by the Certificate
-----------------
of Incorporation or these Bylaws, any action required or permitted to be taken
by the Board of Directors or any committee thereof may be taken without a
meeting if all members of the Board of Directors or of such committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of the proceedings of the Board of Directors or such committee,
as the case may be.
Section 3.13. Telephonic Meeting. Unless restricted by the Certificate
------------------
of Incorporation, any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
Section 3.14. Nominating Committee. The Board may, by resolution passed
--------------------
by a majority of the members of the Board of Directors then in office, designate
a Nominating Committee to consist of two or more members of the Board. A
majority of the Board of Directors then in office shall have the power to change
the membership of the Nominating Committee, fill vacancies therein or remove any
members thereof, either with or without
<PAGE>
- 11 -
cause, at any time. Unless otherwise provided by the Board of Directors or the
Nominating Committee, quorum, voting, and other procedures of the Nominating
Committee shall be the same as those applicable to actions taken by the Board of
Directors. The Nominating Committee may fix its rules of procedure, determine
its manner of acting and fix the time and place, whether within or without the
State of Delaware, of its meetings and specify what notice thereof, if any,
shall be given, unless the majority of the Board of Directors shall otherwise by
resolution provide.
Section 3.15. Other Committees. The Board of Directors may, by
----------------
resolutions passed by a majority of the members of the Board of Directors then
in office, designate members of the Board of Directors to constitute other
committees which shall in each case consist of such number of directors, and
shall have and may execute such powers as may be determined and specified in the
respective resolutions appointing them. Any such committee may fix its rules of
procedure, determine its manner of acting and fix the time and place, whether
within or without the State of Delaware, of its meetings and specify what notice
thereof, if any, shall be given, unless the Board of Directors shall otherwise
by resolution provide. Unless otherwise provided by the Board of Directors or
such committee, quorum, voting and other procedures shall be the same as those
applicable to actions taken by the Board of Directors. A majority of the
members of the Board of Directors then in office shall have the power to change
the membership of any such committee at any time, to fill vacancies therein and
to discharge any such committee or to remove any member thereof, either with or
without cause, at any time. The Corporation shall be governed by subsection (2)
of Section 141(c) of the DGCL.
Section 3.16. Presumption of Assent. A director of the Corporation who
---------------------
is present at a meeting of the Board of Directors when a vote on any matter is
taken is deemed to have assented to the action taken unless he votes against or
abstains from the action taken, or unless at the beginning of the meeting or
promptly upon arrival, the director objects to the holding of the meeting or the
transacting of specified business at the meeting. Any such dissenting votes,
abstentions or objections shall be entered in the minutes of the meeting.
<PAGE>
- 12 -
ARTICLE IV.
Officers
Section 4.1. Designation. The officers of the Corporation shall be
-----------
elected by the Board of Directors and shall include the Chief Executive Officer,
President, Chief Financial Officer, any number of Vice-Presidents, Treasurer,
Secretary and such other officers and assistant officers as the Board may from
time to time appoint, or authorize the Chief Executive Officer to appoint.
Section 4.2. Election and Tenure. Officers and assistant officers of
-------------------
the Corporation may, but need not, also be members of the Board. At its first
meeting after each annual meeting of the stockholders, the Board of Directors
shall elect the officers or provide for the appointment thereof. Unless
otherwise provided by the Certificate of Incorporation, the term of each officer
elected by the Board of Directors shall be until the first meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor is elected and qualified or until his earlier death, resignation or
removal in the manner specified in this Section 4.2. Any officer elected or
appointed by the Board may be removed by the Board at any time with or without
cause by the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of
the members of the Board then in office. Any officer or assistant officer
appointed by another officer may be removed from office with or without cause by
such officer. The removal of an officer without cause shall be without
prejudice to his contract rights, if any. The election or appointment of an
officer shall not of itself create contract rights. Any officer of the
Corporation may resign at any time by giving written notice of his resignation
to the Chairman of the Board, the Chief Executive Officer, or the Secretary.
Any such resignation shall take effect at the time specified therein or, if the
time when it shall become effective shall not be specified therein, immediately
upon its receipt. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Should any vacancy
occur among the officers, the position shall be filled for the unexpired portion
of the term by appointment made by the Board or, in the case of offices held by
officers who may be appointed by other officers, by any officer authorized
<PAGE>
- 13 -
to appoint such officer. Any individual may be elected to, and may hold, more
than one office of the Corporation.
Section 4.3. Duties. The powers and duties of the several officers
------
shall be as provided from time to time by resolution or other directive of the
Board. In the absence of such provisions, the respective officers shall have
the powers and shall discharge the duties customarily and usually held and
performed by like officers of corporations similar in organization and business
purposes to the Corporation.
Section 4.4. Compensation. Officers may be paid such reasonable
------------
compensation as the Board may from time to time authorize and direct. The Board
of Directors may delegate its authority to determine compensation to a
committee.
ARTICLE V.
Stock Certificates and Their Transfer
Section 5.1. Stock Certificates. Every holder of stock in the
------------------
Corporation shall be entitled to have a certificate certifying the number of
shares of the Corporation owned by such holder. Such certificates shall be in
such form (consistent with applicable law) as shall be determined by the Board.
All certificates for shares shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the stock transfer books of the Corporation. All certificates
surrendered to the Corporation for transfer shall be cancelled and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and cancelled, except that in case of a lost
destroyed, stolen, or mutilated certificate a new one may be issued therefor on
such terms and indemnity to the Corporation as the Board may prescribe.
Section 5.2. Registered Stockholders. A record of the name and address
-----------------------
of the holder of each certificate, the number of shares represented thereby and
the date of issue thereof shall be made on the Corporation's books. The
Corporation shall be entitled to recognize the exclusive right of a person
registered on its records as the owner of shares of stock to receive dividends
and to vote as such owner, shall be
<PAGE>
- 14 -
entitled to hold liable for calls and assessments a person registered on its
records as the owner of shares of stock, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares of stock on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of the State of Delaware.
Section 5.3. Transfers of Stock. Transfer of shares of stock of the
------------------
Corporation shall be made in accordance with the DGCL. Transfers of stock shall
be made on the books of the Corporation only by direction of the person named in
the stock certificate or such person's attorney, lawfully constituted in
writing, and only upon the surrender of the certificate therefor accompanied by
a written assignment of the shares evidenced thereby, which certificate shall be
cancelled before any new certificate is issued.
Section 5.4. Transfer Agents and Registrars. The Board of Directors may
------------------------------
appoint, or authorize any officer or officers to appoint, one or more transfer
agents and one or more registrars. If any certificate is countersigned (a) by a
transfer agent other than the Corporation or its employee, or (b) by a registrar
other than the Corporation or its employee, any signature on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
Section 5.5. Regulations. The Board of Directors may make such
-----------
additional rules and regulations, not inconsistent with these Bylaws, as it may
deem expedient concerning the issue, transfer and registration of certificates
for shares of stock of the Corporation.
Section 5.6. Fixing the Record Date. In order that the Corporation may
----------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or, unless prohibited by the
Certificate of Incorporation, to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or
<PAGE>
- 15 -
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which date shall be a permitted record date
under the DGCL with respect to such meeting or action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting, provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 5.7. Lost Certificates. Any person claiming a stock certificate
-----------------
in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit
as to such person's ownership of the certificate and of the facts which go to
prove its loss, theft or destruction. Such person shall also, unless waived by
an authorized officer of the Corporation, give the Corporation a bond, in such
form as may be approved by the Corporation, sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss of the certificate or the issuance of a new certificate.
ARTICLE VI.
Indemnification
Section 6.1. Indemnification Provisions in Certificate of Incorporation.
----------------------------------------------------------
The provisions of this Article VI are intended to supplement Article VIII of the
Certificate of Incorporation pursuant to Section 8.2 of the Certificate of
Incorporation. To the extent that this Article VI contains any provisions
inconsistent with said Article VIII, the provisions of the Certificate of
Incorporation shall govern. Terms defined in such Article VIII shall have the
same meaning in this Article VI.
Section 6.2. Undertakings for Advances of Expenses. If and to the
-------------------------------------
extent the DGCL requires, an advancement by the Corporation of expenses incurred
by an indemnitee pursuant to clause (iii) of the last sentence of Section 8.1 of
the Certificate of Incorporation (hereinafter an "advancement of expenses")
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right
<PAGE>
- 16 -
to appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under Article VIII of the
Certificate of Incorporation or otherwise.
Section 6.3. Claims for Indemnification. If a claim for indemnification
--------------------------
under this Article VI is not paid in full by the Corporation within sixty (60)
days after it has been received in writing by the Corporation, except in the
case of a claim for an advancement of expenses in which case the applicable
period shall be twenty (20) days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim.
If successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and in any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Corporation shall be
entitled to recover such expenses only upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in Section
145 of the DGCL (or any successor provision or provisions). Neither the failure
of the Corporation (including the Board of Directors, independent legal counsel
or its stockholders) to have made a determination prior to the commencement of
such suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
Section 145 of the DGCL (or any successor provision or provisions), nor an
actual determination by the Corporation (including the Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not met
such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to have or
retain such advancement of
<PAGE>
- 17 -
expenses, under Article VIII of the Certificate of Incorporation or this Article
VI or otherwise, shall be on the Corporation.
Section 6.4. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, trustee, officer, employee or agent
of the Corporation or another enterprise against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the DGCL.
Section 6.5. Severability. In the event that any of the provisions of
------------
this Article VI (including any provision within a single section, paragraph or
sentence) is held by a court of competent jurisdiction to be invalid, void or
otherwise unenforceable, the remaining provisions are severable and shall remain
enforceable to the full extent permitted by law.
ARTICLE VII.
General Provisions
Section 7.1. Seal. The seal of the Corporation shall be in such form as
----
shall be approved by the Board of Directors.
Section 7.2. Fiscal Year. The fiscal year of the Corporation shall be
-----------
the calendar year, unless it is changed by resolution of the Board of Directors.
Section 7.3. Checks. Notes. Drafts, Etc. All checks, notes, drafts or
--------------------------
other orders for the payment of money of the Corporation shall be signed,
endorsed or accepted in the name of the Corporation by such officer, officers,
person or persons as from time to time may be designated by the Board of
Directors or by an officer or officers authorized by the Board of Directors to
make such designation.
Section 7.4. Execution of Contracts, Deeds, Etc. The Board may authorize
----------------------------------
any officer, employee or agent to enter into any contract or execute and deliver
any instrument in the name and on behalf of the Corporation. Such authority may
be general or confined to specific instances, or otherwise limited, and if the
Board so provides may be delegated by the person so authorized.
<PAGE>
- 18 -
Section 7.5. Mechanical Endorsement. The Chairman of the Board, Chief
----------------------
Executive Officer, any Vice President or the Secretary may authorize any
endorsement on behalf of the Corporation to be made by such mechanical means or
stamps as any of such officers may deem appropriate.
Section 7.6. Loans. No loans shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by a resolution of the Board. Such authority may be general or
confined to specific instances, or otherwise limited, and if the Board so
provides may be delegated by the person so authorized.
Section 7.7. Voting of Stock in Other Corporations. Unless otherwise
-------------------------------------
provided by resolution of the Board of Directors, the Chief Executive Officer,
from time to time, may (or may appoint one or more attorneys or agents to) cast
the votes that the Corporation may be entitled to cast as a shareholder or
otherwise in any other corporation, any of whose shares or securities may be
held by the Corporation, at meetings of the holders of the shares or other
securities of such other corporation, or consent in writing to any action by any
such other corporation. In the event one or more attorneys or agents are
appointed, the Chief Executive Officer may instruct the person or persons so
appointed as to the manner of casting such votes or giving such consent. The
Chief Executive Officer may, or may instruct the attorneys or agents appointed
to, execute or cause to be executed in the name and on behalf of the Corporation
and under its seal or otherwise, such written proxies, consents, waivers or
other instruments as may be necessary or proper in the circumstances relating to
securities owned by the Corporation.
Section 7.8. Dividends. Subject to the provisions of the DGCL and the
---------
Certificate of Incorporation, dividends upon the shares of capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting. Dividends may be paid in cash, in property or in shares of stock of
the Corporation, unless otherwise provided by the DGCL or the Certificate of
Incorporation.
<PAGE>
- 19 -
ARTICLE VIII.
Amendments
These Bylaws of the Corporation may be amended, altered, changed, adopted
and repealed or new bylaws adopted by the affirmative vote of at least a
majority of the members of the Board of Directors then in office at any regular
or special meeting. The stockholders also shall have the power to amend, alter,
change, adopt and repeal the Bylaws of the Corporation at any annual or special
meeting pursuant to the requirements of the Certificate of Incorporation.
<PAGE>
EXHIBIT 11
SOFTWARE AG SYSTEMS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------------------------------------- ---------------------------
THREE MONTHS NINE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED ENDED
DEC. 31, 1995 DEC. 31, 1996 MAR. 31, 1997 DEC. 31, 1997 MAR. 31, 1998
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding..... 27,500 27,500 24,338 25,119 29,517
Effect of dilutive secu-
rities................. 1,556 1,556 1,556 1,556 1,974
------- ------- ------- ------- -------
Weighted average common
shares outstanding-as-
suming dilution........ 29,056 29,056 25,894 26,685 31,491
======= ======= ======= ======= =======
Calculation of net in-
come per share:
Net income.............. $ 3,326 $ 6,209 $ 1,373 $ 5,338 $ 5,390
======= ======= ======= ======= =======
Net income per share.... $ 0.12 $ 0.23 $ 0.06 $ 0.21 $ 0.18
======= ======= ======= ======= =======
Net income per share-as-
suming dilution........ $ 0.11 $ 0.21 $ 0.05 $ 0.20 $ 0.17
======= ======= ======= ======= =======
</TABLE>
1
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
The companies listed below are directly or indirectly owned by
Software AG Systems, Inc. and are included in its consolidated financial
statements. Software AG Americas, Inc. and Systems Software I, Inc. are wholly
owned subsidiaries of Software AG Systems, Inc. Argenta, Inc., Insight
Consulting, Inc., Software AG Insurance Solutions, Inc., Software AG
Professional Services, Inc., Software A.G. Venezolana, C.A. (except for one
share thereof) and Software AG FSC, Inc. are wholly owned subsidiaries of
Software AG Americas, Inc. Each of Software AG Americas, Latin America
Operations, S.A. de C.V. and SAG Systems (Canada) Holdings Ltd. is jointly owned
in its entirety by Software AG Systems, Inc. and Software AG Americas, Inc.
Software AG Systems (Canada) Inc. is a wholly owned subsidiary of SAG Systems
(Canada) Holdings Ltd. Software AG of Canada Inc. is a wholly owned subsidiary
of Software AG Systems (Canada) Inc.
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ------------------- ------------------------------
<S> <C>
Software AG Americas, Inc. Commonwealth of Virginia
Systems Software I, Inc. State of Delaware
Argenta, Inc. Commonwealth of Virginia
Insight Consulting, Inc. Commonwealth of Virginia
SAG Systems (Canada) Canada
Holdings Ltd.
Software AG Insurance Solutions, Inc. Commonwealth of Virginia
Software AG Professional
Services, Inc. Commonwealth of Virginia
Software AG Americas, Latin
America Operations
S.A. de C.V. Mexico
Software A.G. Venezolana, Venezuela
C.A.
Software AG Systems (Canada) Inc. Canada
Software AG of Canada, Inc. Canada
Software AG FSC, Inc. Virgin Islands
</TABLE>
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Washington, D.C.
April 21, 1998
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Software AG Systems, Inc., a corporation organized under the laws of
the State of Delaware, (the "Corporation"), hereby constitutes and appoints
Daniel F. Gillis, Harry K. McCreery, Karl Drews, Robert B. Ott and Richard E.
Baltz, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and on his or her behalf and in his or her
name, place and stead, in any and all capacities, to sign, execute and file with
the Securities and Exchange Commission (or any other governmental or regulatory
authority) a Registration Statement on Form S-1 (or any other appropriate form),
and any and all amendments (including post-effective amendments) thereto, with
all exhibits and any and all documents required to be filed with respect
thereto, relating to the registration under the Securities Act of 1933, as
amended, of shares of the Corporation's common stock as authorized by the Board
of Directors of the Corporation, granting unto said attorneys, and each of them,
full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully to
all intents and purposes as he himself or she herself might or could do if
personally present, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his or her hand as of the date specified.
Dated: 4/20/98
/s/ Carl J. Rickertsen
------------------------------
Carl J. Rickertsen
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Software AG Systems, Inc., a corporation organized under the laws of
the State of Delaware, (the "Corporation"), hereby constitutes and appoints
Daniel F. Gillis, Harry K. McCreery, Karl Drews, Robert B. Ott and Richard E.
Baltz, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and on his or her behalf and in his or her
name, place and stead, in any and all capacities, to sign, execute and file with
the Securities and Exchange Commission (or any other governmental or regulatory
authority) a Registration Statement on Form S-1 (or any other appropriate form),
and any and all amendments (including post-effective amendments) thereto, with
all exhibits and any and all documents required to be filed with respect
thereto, relating to the registration under the Securities Act of 1933, as
amended, of shares of the Corporation's common stock as authorized by the Board
of Directors of the Corporation, granting unto said attorneys, and each of them,
full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully to
all intents and purposes as he himself or she herself might or could do if
personally present, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF ,the undersigned director and/or officer has hereunto
set his or her hand as of the date specified.
Dated: 4/20/98
/s/ Daniel Gillis
--------------------------
Daniel Gillis
<PAGE>
POWER OF ATTORNEY
----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Software AG Systems, Inc., a corporation organized under the laws of
the State of Delaware, (the "Corporation"), hereby constitutes and appoints
Daniel F. Gillis, Harry K. McCreery, Karl Drews, Robert B. Ott and Richard E.
Baltz, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him or her and on his or her behalf and in
his or her name, place and stead, in any and all capacities, to sign, execute
and file with the Securities and Exchange Commission (or any other governmental
or regulatory authority) a Registration Statement on Form S-1 (or any other
appropriate form), and any and all amendments (including post-effective
amendments), thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration under the Securities
Act of 1933, as amended, of shares of the Corporation's common stock as
authorized by the Board of Directors of the Corporation, granting unto said
attorneys, and each of them, full power and authority to do and to perform each
and every act and thing requisite and necessary to be done in order to
effectuate the same as fully to all intents and purposes as he himself or she
herself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his or her hand as of the date specified.
Dated: 4/20/98
/s/ Philip S. Dauber
------------------------------
Dr. Philip S. Dauber
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Software AG Systems, Inc., a corporation organized under the laws of
the State of Delaware, (the "Corporation"), hereby constitutes and appoints
Daniel F. Gillis, Harry K. McCreery, Karl Drews, Robert B. Ott and Richard E.
Baltz, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and on his or her behalf and in his or her
name, place and stead, in any and all capacities, to sign, execute and file with
the Securities and Exchange Commission (or any other governmental or regulatory
authority) a Registration Statement on Form S-1 (or any other appropriate form),
and any and all amendments (including post-effective amendments) thereto, with
all exhibits and any and all documents required to be filed with respect
thereto, relating to the registration under the Securities Act of 1933, as
amended, of shares of the Corporation's common stock as authorized by the Board
of Directors of the Corporation, granting unto said attorneys, and each of them,
full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully to
all intents and purposes as he himself or she herself might or could do if
personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his or her hand as of the date specified.
Dated: April 20, 1998
----------------
/s/ Dr. Erwin Konigs
-----------------------------
Dr. Erwin Konigs
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Software AG Systems, Inc., a corporation organized under the laws of
the State of Delaware, (the "Corporation"), hereby constitutes and appoints
Daniel F. Gillis, Harry K. McCreery, Karl Drews, Robert B. Ott and Richard E.
Baltz, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and on his or her behalf and in his or her
name, place and stead, in any and all capacities, to sign, execute and file with
the Securities and Exchange Commission (or any other governmental or regulatory
authority) a Registration Statement on Form S-1 (or any other appropriate form),
and any and all amendments (including post-effective amendments) thereto, with
all exhibits and any and all documents required to be filed with respect
thereto, relating to the registration under the Securities Act of 1933, as
amended, of shares of the Corporation's common stock as authorized by the Board
of Directors of the Corporation, granting unto said attorneys, and each of them,
full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully to
all intents and purposes as he himself or she herself might or could do if
personally present, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his or her hand as of the date specified.
Dated: April 20, 1998
----------------
/s/ Edward E. Lucente
-----------------------------------
Edward E. Lucente
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Software AG Systems, Inc., a corporation organized under the laws of
the State of Delaware, (the "Corporation"), hereby constitutes and appoints
Daniel F. Gillis, Harry K. McCreery, Karl Drews, Robert B. Ott and Richard E.
Baltz, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and on his or her behalf and in his or her
name, place and stead, in any and all capacities, to sign, execute and file with
the Securities and Exchange Commission (or any other governmental or regulatory
authority) a Registration Statement on Form S-1 (or any other appropriate form),
and any and all amendments (including post-effective amendments) thereto, with
all exhibits and any and all documents required to be filed with respect
thereto, relating to the registration under the Securities Act of 1933, as
amended, of shares of the Corporation's Common stock as authorized by the Board
of Directors of the Corporation, granting unto said attorneys, and each of them,
full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully to
all intents and purposes as he himself or she herself might or could do if
personally present, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his or her hand as of the date specified.
Dated: April 20, 1998
----------------
/s/ Dr. Paul G. Stern
------------------------------
Dr. Paul G. Stern
